The following points highlight the top seven types of non-performing assets. The types are: 1. Term Loans 2. Cash Credit and Overdrafts 3. Agricultural Advances 4. Exempted Assets 5. Advances under Rehabilitation Packages 6. Take-out Finance 7. Advances Covered by the Guarantees of DICGC/ECGC.
Non-performing Assets: Type # 1. Term Loans:
A term loan facility will be treated as NPA for the year ending 31st March, 1998 and onwards if interest or instalment of principal remains past due for a period of more than 90 day.
Non-performing Assets: Type # 2. Cash Credit and Overdrafts:
A cash credit and overdraft account will be treated as NPA if the account remains out of order for a period more than 90 days.
An account is treated as ‘out of order’ any of the following conditions is fulfilled:-
(a) The outstanding balance remains continuously in excess of the sanctions limit/during power.
(b) Though the outstanding balance is less than the sanctioned limit/drawing power
(i) there are no credits continuously for more than 90 days as on the date of balance sheet; or
(ii) credits during the aforesaid period are not enough to cover the interest debited during the same period more than 90 days.
(c) Further any amount due to the bank under any credit facility it overdue if it is not paid on the due date fixed by the bank.
Non-performing Assets: Type # 3. Agricultural Advances:
With effect from September 30, 2004, Advances granted for agriculture purposes become NPA if interest and / or instalment of principal remains overdue for two crop seasons in case of short duration crops and a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season.
Crops having crop season of more than one year i.e. up to the period of harvesting the crops raised will be termed as ‘long duration’ crops and other crops will be treated as ‘short duration’ crops. These NPA nouns would also be applicable to agricultural term loans.
In respect of other agricultural loans and term loans given to non-agriculturists, identification of NPAs would be done on the basis as per non agricultural advances which are, at present, 90 days delinquency norm.
Non-performing Assets: Type # 4. Exempted Assets:
Certain categories of advances have been exempted from being treated as non-performing for the purpose of income determination and / or provisioning, even though they meet the aforesaid criteria.
Briefly, they are as follows:
(i) Advances secured against term deposits. National Savings Certificates, Vikas Patras, Kisan Vikas Patras and surrender value of life insurance policies.
(ii) Advances guaranteed by Government of India and/or State Governments. But this exemption in only for the purpose of assets classification and provisioning norms and not for the purposes of recognition of income. It means income in respect of the facility will not be recognised until it is actually received.
Also, in the case of state government guarantees, this exemption is available only where the guarantees have not been invoked. The State Government guaranteed accounts which have been invoked upon becoming NPA are to be treated at par with other advances for purpose of asset classification, income recognition and provisioning norms.
Non-performing Assets: Type # 5. Advances under Rehabilitation Packages:
Where additional facilities are granted to a unit under rehabilitation packages approved by the Board for Industrial and Financial Reconstruction (BIFR) or by term-lending institutions or the bank (on its own or under consortium arrangement), provision should continue to be made for the dues in respect of existing credit facilities.
As regards the additional facilities, provision need not be made for a period of one year from the date of disbursement in respect of additional facilities sanctioned under rehabilitation packages approved by BIFR/term – lending institution.
Similarly, no provision need be made for a period of one year in respect of additional facilities granted to a sick small-scale industrial unit in accordance with a rehabilitation package/nursing programme drawn up by the bank itself or under a consortium arrangement.
After the period of one year, the bank in consultation with its auditors would take a view whether there is need for making provision in respect of the additional facilities sanctioned.
Non-performing Assets: Type # 6. Take-out Finance:
In the case of take-out finance, if based on record of recovery, the account is classified by their lending bank as NPA it should make provision for loan losses as per guidelines. The provision should be reversed when the account is taken over by the taking-over institution. On taking over the account, the taking-over institution should make provisions as per the guidelines.
Non-performing Assets: Type # 7. Advances Covered by the Guarantees of DICGC/ECGC:
In the case of advances guaranteed by Expert Credit Guarantee Corporation (ECGC) or by Deposit Insurance and Credit Guarantee Corporation (DICGC), provision is required to be made only for the balance in excess of the amount guaranteed by these corporations.
In case the bank also holds a security in respect of an advance guaranteed by ECGC/DICGC, the realisable value of the security should be deducted from the outstanding balance before the ECGC/DICGC guarantee is off-set. Classification of Bank Advances.
The banks have to classify their advances into the following four broad groups:
(i) Standard Assets:
Standard assets are those which do not disclose any problems and which do not carry more than normal risk attached to the business. Such assets are not NPA.
(ii) Sub-standard Assets:
Sub-standard assets are those which have been classified as NPA for a period not exceeding 12 months. In such cases, the current net worth of the borrower / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full.
Such assets will have well-defined credit weaknesses that jeopardise the liquidation of the debts and are characterised by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.
In the case of the term loans, those where instalments of principal are overdue for period exceeding one year should be treated as sub-standard.
An asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least two years of satisfactory performance under the renegotiated or rescheduled terms.
(iii) Doubtful Debts:
Doubtful debts are those which have remained NPA for a period exceeding 18 months. In the case of term loans, those where instalments of principal have remained overdue for a period exceeding 18 months should be treated as doubtful.
As in the case of sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of an advance automatically. Collection or liquidation, of doubtful debts on the basis of currently known facts is highly questionable and improbable.
(iv) Loss Assets:
Loss assets are those where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amounts have not been written off wholly a partly. Such assets are considered uncollectable and of such little values that their continuance as bank assets in not warranted although there may be some salvage or recovery values.
The above classification is only meant for the purpose of computing amount of provision to be made in respect of advances. As far as the balance sheet presentation is concerned, it is governed by the Third Schedule to Banking Regulation Act, 1949 which requires classification of advances altogether differently
Provision for Loss:
A bank is required to make a provision for loss in respect of different classes of its advances as follows:
(a) Standard Assets:
Provision has to be made as follows:
(b) Sub-standard Assets:
Provision has to be on the following lines:
(c) Doubtful Assets:
(i) Full provision to the extent of the unsecured portion should be made. In doing so, the realizable value of the security available to the bank should be determined on a realistic basis.
DICGC/ ECGC cover is also taken into account. In case the advance covered by CGTSI guarantee becomes non-performing, no-provision need be made towards the guaranteed portion but the amount outstanding in excess of the guaranteed portion should be provided for as per the guidelines on provisioning for non-performing advances.
Additionally, 25%-100% of the secured portion should be provided for, depending upon the period for which the advance has been considered as a doubtful asset, as detailed below:-
(d) Loss Assets:
The entire amount should be written off or full provision should be made for the amount outstanding.