# Prudential Norms on IRACP - NPAs & Provisioning
## Classification of Advances
```
Advances
|
+---------+----------+
| |
Standard NPA
| |
Standard +-------+---------+
Regular | | |
+ Sub- Doubtful Loss
SMA-0/1/2 standard (D1/D2/D3)
```
### Standard Loans
- Regular
- Standard - Special Mention Accounts (SMA) — early stress signals:
- SMA-0: Accounts showing stress signals (overdue ≤ 30 days)
- SMA-1: Overdue between 31 to 60 days
- SMA-2: Overdue between 61 to 90 days
## Definition of NPA
An NPA is a loan/advance where:
1. Interest or instalment of principal remains overdue for a period of more than 90 days in respect of a Term Loan.
2. A/c remains 'out of order' for Overdraft/Cash Credit (OD/CC) — see definition below.
3. Bill remains overdue for a period of more than 90 days in case of bills purchased and discounted.
### 'Out of Order'
An account should be treated as 'out of order' if:
1. Outstanding balance remains continuously in excess of sanctioned limit / Drawing Power (DP), OR
2. In cases where outstanding balance in the principal operating account is less than sanctioned limit/DP, but there are no credits continuously for 90 days as on date of Balance Sheet, OR
3. Credits are there but are not enough to cover interest debited during the same period.
### 'Overdue'
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.
## Categories of NPA & Provisioning Requirements
### 1. Substandard Assets
- Definition: An asset that has remained NPA for a period less than or equal to 12 months.
- Provision required: 15% of outstanding balance.
### 2. Doubtful Assets
- Definition: An asset that has remained in the substandard category for a period of 12 months (i.e., NPA for more than 12 months).
- Provision required (split: Secured + Unsecured portion):
| Sub-category | Period in Doubtful | Secured | Unsecured |
|---|---|---|---|
| D1 | Up to 1 year | 25% | 100% |
| D2 | 1 to 3 years | 40% | 100% |
| D3 | More than 3 years | 100% | 100% |
### 3. Loss Assets
- Definition: An 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.
- Provision required: 100%.
## Key Principles of NPA Classification
1. Based on Record of Recovery — Classification depends on recovery record, NOT on availability of security or net worth of borrower/guarantor.
2. Borrower-wise, Not Facility-wise — If one facility of a borrower becomes NPA, ALL facilities (including investments in securities) of that borrower are termed as NPA.
## Special Situations
### Government Guaranteed Advances
| Type | Treatment |
|---|---|
| CG guaranteed — guarantee NOT invoked/repudiated | Classified as Standard Asset but NPA for Income Recognition purpose |
| SG guaranteed | Treated as NPA if overdue more than 90 days — for BOTH Provisioning and Income recognition |
### A/c Regularised Near B/S Date
- Accounts where a few credits are recorded just before Balance Sheet date should be handled with care.
- If the account indicates inherent weakness based on the data available, the account should be deemed as NPA.
- Auditor's task: Check sample transactions immediately before and immediately after the closing of the Financial Year.
### Advances Under Consortium
- Consortium advance = loan to a borrower by two or more Banks jointly forming a Consortium.
- Usually, the bank with the higher share leads the consortium.
- Classification is based on the record of recovery of respective individual member banks.
- Where the bank receiving remittances from the borrower is not parting with the share of other member banks, the account should be treated as NPA in the books of other member banks.
- Lead Bank is responsible for computing the Drawing Power (DP) of the borrower and allocating it to member banks.
### Erosion in Value of Security / Frauds Committed by Borrowers
Such accounts should be straight-away classified as Doubtful or Loss as appropriate:
- Significant erosion = realisable value of security is less than 50% of the value assessed by the bank → Classify as Doubtful.
- Severe erosion = realisable value of security is less than 10% of outstanding → Existence of security may be ignored; classify as Loss Asset. Either written off or fully provided for.
### Agricultural Advances
Two types based on crop season:
- Long-duration crops — crop season longer than 1 year.
- Short-duration crops — crop season ≤ 1 year (crops that are not long-duration).
The crop season is determined by the State Level Bankers' Committee (SLBC) in each state.
NPA norms:
| Crop | NPA if instalment/interest overdue for: |
|---|---|
| Short-duration | 2 crop seasons |
| Long-duration | 1 crop season |
Agricultural Advances affected by Natural Calamities:
Banks may decide their own relief measures (rescheduling / fresh short-term loan). NPA classification will be governed by rescheduled terms.
### Advances to Staff
- As a banker: Interest-bearing staff loans are included as part of Advances.
- If interest is payable after recovery of principal: interest need not be considered overdue from first quarter onwards. Such loans become NPA only on default in instalment of principal or interest on respective due dates.
- As an employer (not banker): Such staff advances go under 'Others' under Schedule of Other Assets.
### Advances Against Term Deposits, NSCs, KVPs/IVPs, Life Policies
- Need NOT be treated as NPA, provided adequate margin is available in the account.