What are prudential norms on asset classification and provisioning?

Reserve Bank of India (RBI) has prescribed prudential norms on asset classification and provisioning.

What are norms for early identification and reporting of stress?

Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories.

SMA Sub-categories	Basis for classification – Principal or interest payment or any other amount wholly or partly overdue between
SMA-0	Up to 30 days
SMA-1	More than 30 days and up to 60 days
SMA-2	More than 60 days and up to 90 days

In the case of revolving credit facilities like cash credit / overdraft, the SMA sub-categories will be as follows –

SMA Sub-categories	Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of
SMA-1	More than 30 days and up to 60 days
SMA-2	More than 60 days and up to 90 days

Scheduled commercial banks shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC), on all borrowers having aggregate exposure of ₹5 crore and above with them. CRILC-Main Report shall be submitted on a monthly basis. In addition, lenders shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of ₹5 crore and above) by close of business on every Friday, or the preceding working day if Friday happens to be a holiday.

What are Non-performing Assets (NPAs)?

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

A non-performing asset (NPA) is a loan / advance where –

1. Interest and / or instalment of principal remains overdue for more than 90 days in respect of a term loan.
2. The account remains ‘out of order’, in respect of an Overdraft / Cash Credit (OD / CC).
3. The bill remains overdue for more than 90 days in the case of bills purchased and discounted.
4. The instalment of principal or interest thereon remains overdue for 2 crop seasons for short duration crops.
5. The instalment of principal or interest thereon remains overdue for 1 crop season for long duration crops (with crop season longer than 1 year).
6. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of Securitisation of Standard Assets Directions, 2021.
7. In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for 90 days from the specified due date for payment.

What is ‘Out of Order’ status?

A CC / OD account shall be treated as ‘out of order’ if –

1. The outstanding balance in the CC / OD account remains continuously in excess of the sanctioned limit / drawing power for 90 days.
2. The outstanding balance in the CC / OD account is less than the sanctioned limit / drawing power but there are no credits continuously for 90 days.
3. The outstanding balance in CC / OD account is less than the sanctioned limit / drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

What is ‘Overdue’ status?

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. 

What are the categories of NPAs?

Banks are required to classify NPAs into the following three categories based on the period for which the asset has remained non-performing.

Category of NPA	Criteria
Substandard Assets	Asset has remained NPA for less than or equal to 12 months
Doubtful Assets	Asset has remained in the substandard category for 12 months
Loss Assets	Asset where loss has been identified by the bank or internal / external auditors or RBI inspection, but the amount has not been written off wholly

What are conditions for upgradation of loan accounts classified as NPAs?

• The loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. 
• In case of borrowers having more than one credit facility from a bank, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities. 

Whether asset classification to be borrower-wise or facility-wise?

It is difficult to envisage a situation when only one facility to a borrower / one investment in any of the securities issued by the borrower becomes a problem credit / investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA / NPI and not the particular facility / investment or part thereof which has become irregular.

What are asset classification norms for Credit Card Accounts?

1. In credit card accounts, the amount spent is billed to the card users through a monthly statement with a definite due date for repayment. Banks give an option to the card users to pay full amount / fraction of it, i.e., minimum amount due, on the due date and roll-over the balance amount to the subsequent months’ billing cycle.
2. A credit card account will be treated as NPA if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date mentioned in the statement.
3. Banks shall report a credit card account as ‘past due’ to credit information companies (CICs) or levy penal charges, viz. late payment charges, etc., if any, only when a credit card account remains ‘past due’ for more than 3 days. 
4. The number of ‘days past due’ and late payment charges shall, however, be computed from the payment due date mentioned in the credit card statement.

What are the provisioning norms?

The banks should make provision on the NPAs on the basis of classification of assets into prescribed categories.

Loss Assets

• Loss assets should be written off. 
• If loss assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.

Doubtful assets

	Period for which the advance has remained in ‘doubtful’ category	Provisioning requirement (%)
Unsecured portion of loan	NA	100
Secured portion of loan	Up to 1 year	25
	1 to 3 years	40
	More than 3 years	100

Substandard assets

	Provisioning requirement (%)
General provision without making any allowance for ECGC guarantee cover and securities available	15% on total outstanding
‘Unsecured exposures’ which are identified as ‘substandard’	Additional provision of 10% i.e., total of 25% on outstanding balance
If safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard	20% instead of the aforesaid prescription of 25%

Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank / approved valuers / RBI’s inspecting officers, is up to 10% of the outstanding exposure. 

Standard assets

	Provisioning requirement (%)
Farm Credit to agricultural activities, individual housing loans and Small and Micro Enterprises (SMEs) sectors	0.25
Advances to Commercial Real Estate (CRE) Sector	1
Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH)	0.75
Housing loans extended at teaser rates i.e. at comparatively lower rates of interest in the first few years, after which rates are reset at higher rates.	Increased from 0.40% to 2% in view of higher risk associated with such loans. 0.40% after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’.
Restructured advances	As applicable for restructured advances
Advances restructured and classified as standard in terms of the Master Direction – Relief Measures by Banks in Areas affected by Natural Calamities Directions 2018	5
All other loans and advances not included above	0.40

What are other norms on asset classification and provisioning?

• In respect of fraud cases, banks should normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts), immediately upon a fraud being detected. Banks have the option to make the provisions over a period, not exceeding 4 quarters, commencing from the quarter in which the fraud has been detected.
• In case of restructuring, the accounts classified as 'standard' shall be immediately downgraded as NPAs, i.e., ‘sub-standard’. NPAs would continue to have the same asset classification as prior to restructuring.
• The list of suit-filed accounts and non-suit filed accounts of Wilful Defaulters (₹25 lakh and above) is submitted by banks to Credit Information Companies (CICs) of which they are members, who display the same on their respective websites. 

References

Reserve Bank of India. (2022, April 01). 'Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12281&Mode=0

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