FEDERAL BANK - RECOVERY MANAGEMENT

CHAPTER NO 1: IRAC NORMS INCOME RECOGNITION AND ASSET CLASSIFICATION

CLASSIFICATION OF ASSETS
STANDARD ASSETS
SUB STANDARD ASSETS
DOUBTFUL ASSETS
LOSS ASSETS
STANDARD ASSETS Standard assets service their interest and principal instalments on time
although they occasionally default up to a period of 90 days.
Standard assets are also called performing assets.
They yield regular interest to the banks and return the due principal on time and thereby
help the banks earn profit and recycle the repaid part of the loans for further lending.
NON PERFORMING ASSET (NPA) : An asset, including a leased asset, becomes non performing
when it ceases to generate income for the bank.
SUB STANDARD ASSET It is a non performing asset (NPA) where;
Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
The account remainsout of order in respect of an Overdraft/Cash Credit (OD/CC) for more
than 90 days,
Bills remain overdue for a period of more than 90 days in the case of bills purchased and
discounted,
An account where the regular/ ad hoc credit limits have not been reviewed/ renewed within
180 days from the due date/ date of ad hoc sanction will be treated as NPA.
Instalment of principal or interest there on remains overdue for two crop seasons for short
duration crops,
One instalment of principal or interest there on remains overdue for one crop season for
long duration crops.
A substandard asset would be one, which has remained NPA for a period less than or equal
to 12 months.
Out of Order
An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90 days as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same
period, these accounts should be treated as 'out of order'.
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.
Doubtful Assets
When an Asset remains Sub-standard for more than 12 months, it will be called a doubtful asset.
There are 3 categories of Doubtful Assets.
(i) DA 1: Doubtful asset for a period upto 12 months
(ii) DA 2: Doubtful asset for a period of more than 12 months upto 36 months
(iii) DA 3: Doubtful asset beyond 36 months
In case where the borrower has involved in a fraud or similar offences:
A Standard Asset after becoming an NPA or a Substandard asset can be straightaway classified
as a Doubtful Asset even before completion of 12 months if erosion in the value of security can
be reckoned as significant when the realizable value of the security is less than 50 per cent of
the value assessed by the bank.
Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection. These are generally considered uncollectible.
A Standard Asset after becoming an NPA or a Substandard asset can be straightaway classified
as a Loss Asset even before completion of 12 months if erosion in the value of security can be
reckoned as significant when the realizable value of the security is less than 10 per cent of the
outstandings in the loan account.
Exempted Categories:
Advance against bank's term deposits, NSCs, IVPs, KVPs, and Life Policies will not be
classified as NPA if the outstanding balance is fully covered by such securities. These
advances come under the exempted category for the purpose of income recognition and
asset classification.
The system should ensure that Identification of Assets as NPAs should be done on an ongoing
basis.
Doubts in asset classification due to any reason are settled through specified internal
channels within one month from the date on which the account would have been classified
as NPA as per prescribed norms.
Banks should also make provisions for NPAs as at the end of each calendar quarter i.e as at
the end of March / June / September / December, so that the income and expenditure
account for the respective quarters as well as the P&L account and balance sheet for the
year-end reflects the provision made for NPAs.
INCOME RECOGNITION
Income Recognition NPAs
The policy of income recognition has to be objective and based on the record of recovery.
Income from non-performing assets (NPA) is not recognised on accrual basis but is booked
as income only when it is actually received. Therefore, banks should not take to income
account interest on non-performing assets on accrual basis.
P R KHANNA COMMITTEE ON ASSET CLASSIFICATION
P R Khanna committee was set up by RBIs Board for Financial Supervision (BFS) in March 2000 to
broadly examine the causes for divergence in asset classification by banks and make suitable
recommendations to narrow them down.
RBI has taken a tough stance on divergences in classification of non-performing assets
(NPAs) by banks.
The banks should ensure scrupulous compliance with the instructions for recognition of
credit impairment and view aberrations by dealing officials seriously.
To hold the bankers personally accountable in case of violation of the fine-tuned NPA
classification norms including imposition of monetary penalties on the bankers responsible
for non-compliance.
The responsibility and validation levels for ensuring proper asset classification has to be fixed
by the bank.
The system should ensure that doubts in asset classification due to any reason are settled
through specified internal channels within one month from the date on which the account
would have been classified as NPA as per RBI guidelines.
The banks should establish appropriate internal systems to eliminate the tendency to delay
or postpone the identification of NPAs, especially of high value accounts.
The banks may fix a minimum cut-off point to decide what should constitute a high value
account depending upon their respective business levels. The cut-off point should be valid
for the entire accounting year.
In case of any delay in submission of Stock Statements by large borrowers due to practical
difficulties, Available stock statements relied upon by the banks for determining drawing
power should not be older than three months.