Prudential Norms on Income Recognition, Asset Classification

8/13/2019 Prudential Norms on Income Recognition, Asset Classification

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Prudential Norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances

In line with the international practices and as per the

recommendations Narasimham committee, RBI has introduced,in a phased manner, prudential norms for income recognition,

asset classification and provisioning for the advances portfolio

of the banks so as to move towards greater consistency and

transparency in the published accounts.policy of income recognition is objective considerations & not

subjective.

lassification of assets has to be done on the basis of

objective criteria to ensure a uniform and consistent applicationof the norms.

!he provisioning to be made on the basis of the classification

of assets based on the period for which the asset has remained

nonperforming and the availability of security and the realisable


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"efinitions Nonperforming #sset$ #n asset, including a leased

asset, becomes nonperforming when it ceases to

generate income for the bank. N%# is a loan or an advance where$

i interest and' or installment of principal remain overduefor a period of more than () days in respect of a term

loan,ii the account remains *out of order+ in respect of an

verdraft'ash redit -"',

iii the bill remains overdue for a period of more than ()

days in the case of bills purchased and discounted,-iv the installment of principal or interest thereon remains

overdue for two crop seasons for short duration crops,

-v the installment of principal or interest thereon remainsoverdue for one crop season for long duration crops


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Banks should, classify an account as N%# only ifthe interest charged during any uarter is notserviced fully within () days from the end of theuarter.

/ut of rder/ status#n account should be treated as 'out of order'ifthe outstanding balance remains continuously ine0cess of the sanctioned limit'drawing power. In

cases where the outstanding balance in theprincipal operating account is less than thesanctioned limit'drawing power, but there are nocredits continuously for () days as on the date of

Balance 1heet or credits are not enough to coverthe interest debited during the same period, theseaccounts should be treated as 'out of order'.

*verdue+

#ny amount due to the bank under any creditfacility is *overdue+ if it is not paid on the due date


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INCOME RECOGNITION Internationally income from N%# is not recognised

on accrual basis but is booked as income onlywhen it is actually received.

Interest on advances against term deposits, N1s,I2%s, 32%s and 4ife policies may be taken toincome account on the due date, providedadeuate margin is available in the accounts.

If 5overnment guaranteed advances becomeN%#, the interest on such advances should not betaken to income account unless the interest hasbeen realised.

If any advance, including bills purchased anddiscounted, becomes N%# as at the close of anyyear, interest accrued and credited to incomeaccount in the corresponding previous year, should

be reversed or provided for if the same is not


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In respect of NPAs, fees, commission and similar income t!at !ave accrued s!ould cease

to accrue in t!e current period and s!ould %e reversed or provided for "it! respect to

past periods, if uncollected$

Interest realised on NPAs ma# %e ta&en to income account provided t!e credits in t!e

accounts to"ards interest are not out of fres! additional credit facilities sanctioned to

t!e %orro"er concerned$

(an&s can de%it interest to an NPA account ta&ing t!e same to Interest )uspense

Account or maintaining onl# a record of suc! interest in separate accounts$

(an&s are re*uired to classif# nonperforming assets into t!e follo"ing + categories

%ased on t!e period for "!ic! t!e asset !as remained nonperforming and t!e realisa%ilit#

of t!e dues

a )u%standard Assets% -ou%tful Assets

c .oss Assets

)u%standard Assets /$E$0 +1$+$2334, a su%standard asset "ould %e one, "!ic! !as

remained NPA for a period less t!an or e*ual to 12 mont!s 5 "!ere

t!e current net "ort! of t!e %orro"er guarantor or

t!e current mar&et value of t!e securit# c!arged is not enoug! to ensure recover# of t!edues to t!e %an&s in full$

-ou%tful Assets /$E$0 +1$+$2334, an asset "ould %e classified as dou%tful if it !as

remained in t!e su%standard categor# for a period of more t!an 12 mont!s$

.oss Assets A loss asset is one "!ere loss !as %een identified %# t!e %an& or internal or

e6ternal auditors or t!e R(I inspection %ut t!e amount !as not %een "ritten off "!oll#$ In

ot!er "ords, suc! an asset is considered uncollecti%le and of suc! little value t!at itscontinuance as a %an&a%le asset is not "arranted alt!oug! t!ere ma# %e some salvage


6/16

PRO7I)IONING NORM) 4oss assets

4oss assets should be written off. If loss assets remainin the books for any reason, 6)) percent of the

outstanding should be provided for."oubtful assetsi 6))7 of the advance which is not covered by therealisable value of the security to which the bank has avalid recourse and the realisable value is estimated on a

realistic basis. ii In regard to the secured portion, provision may be

made on the following basis$ Period for "!ic! t!e advance !as remained in

8dou%tful9 categor# Provision re*uirement :; 8p to one year 9) ne to three years :)

;ore than three years 6))


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1ubstandard assets$# general provision of 6)7 on total outstanding should bemade without making any allowance for


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1tandard assets

-iBanks should make general provision for standardassets at the following rates for the funded outstandingon global loan portfolio basis$

-a direct advances to agricultural and 1;< sectors at).9> per cent?-b residential housing loans beyond Rs. 9) lakh at 67-c advances to specific sectors, i.e., personal loans-including credit card receivables, loans and advancesualifying as capital market e0posures, ommercialreal estate loans, and 4oans and advances to Non=deposit taking NB@s at 97

-d all other advances not included in -a, -b and -c

above, at ).A) per cent.


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Guidelines on purc!asesale of Non Performing 0inancial

Assets T!ese guidelines "ould %e applica%le to %an&s, 0Is and N(0Cs

purc!asing selling non performing financial assets, from to ot!er

%an&s0IsN(0Cs :e6cluding securitisation companies reconstructioncompanies$

A financial asset, including assets under multipleconsortium %an&ing

arrangements, "ould %e eligi%le for purc!asesale in terms of t!ese

guidelines if it is a nonperforming assetnon performing investment in

t!e %oo&s of t!e selling %an&$ T!e reference to 8%an&9 in t!e guidelines on purc!asesale of

nonperforming financial assets "ould include financial institutions and

N(0Cs$

i A %an& "!ic! is purc!asing selling nonperforming financial assets

s!ould ensure t!at t!e purc!ase sale is conducted in accordance "it!a polic# approved %# t!e (oard$ T!e (oard s!all la# do"n policies and

guidelines for t!e same$

a Non performing financial assets t!at ma# %e purc!ased sold

Prudential Norms on Income Recognition, Asset Classification

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