INCOME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING & COMPILATION OF YEAR-END RETURNS AS ON

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1 ANDHRA PRAGATHI GRAMEENA BANK HEAD OFFICE :::: KADAPA Cir.No BC-CST INCOME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING & COMPILATION OF YEAR-END RETURNS AS ON ooo- The prudential norms applicable as on and necessary guidelines are furnished hereunder. Branches are required to conduct the exercise of asset classification, interest reversal and computation of provision requirement for all borrowal accounts accordingly and compile the Year End Returns pertaining to advances as on for the purpose of audit and annual closing of accounts. Branches are advised to strictly adhere to the norms and there shall not be any deviations ASSET CLASSIFICATION & INCOME RECOGNITION Branches shall classify all borrowal accounts into Performing (Standard) Assets and Non Performing (Sub-standard, Doubtful & Loss ) assets as per delinquency norms. The norms and guidelines are furnished below. The availability of security or net worth of the borrower/guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is to be based on record of recovery only A non-performing asset (NPA) is defined as a loan/advance where- i) Interest and/or instalment of principal remains overdue for a period more than 90 days in respect of a term loan, ii) The account remains out of order for 90 days in respect of an Overdraft/Cash Credit (OD/CC), iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. iv) A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. v) 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, vi) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. (..2)

2 For the purpose of above norms, long duration Crops would be crops with crop season longer than 1 year and crops which are not long duration crops would be treated as Short duration crops. The Crop season for each crop, which means the period upto harvesting of the crops raised, would be as determined by the State Level Bankers Committee/District Level Technical Committee. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed by him. In the light of the above, the crop loans disbursed for cultivation of Banana, Papaya, Sugarcane etc., and crop loans disbursed for maintenance of Horticultural/Plantation crops like Citrus, Mango etc., which are repayable not beyond one year shall also be treated as crop loans extended for short duration crops The norms 1.01 (iv & v) are applicable to all direct agricultural advances listed in Annexure-1. In respect of agricultural loans other than those specified in Annexure-1 i.e. loans for allied activities viz. Dairy, Poultry, Sericulture, animal Husbandry etc, and term loans given to non-agriculturists, identification of NPAs shall be done on the same basis as non-agriculture advances i.e. 90 day delinquency norm 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 (31st March) or credits are not enough to cover the interest debited during the same period, these accounts should be treated as out of order (from the beginning of 90 days and hence the account becomes NPA on 90 th day) 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 Other parameters to treat an Overdraft (OD)/Cash Credit (CC) accounts as NPAs: Non submission of stock statement: The outstanding in the cash credit /overdraft account based on drawing power calculated from stock statements older than three months would be deemed as irregular. A cash credit/ overdraft account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrowers financial position is satisfactory Ex: Drawals permitted during November against drawing power based on stock statement as on 31 st July or before are irregular. Drawals permitted during December against drawing power based on stock statement as on 31 st August or before are irregular. If such irregular drawals are permitted in an account continuously for 90 days, the account becomes NPA on 90 th day. In the above case, if drawals are permitted during November based on stock statement as on 31 st July or before, during December based on stock statement as on 31 st August or before and during January based on stock statement as on 30 th September or before, the account will slip to NPA on 29 th January. (..3)

3 Non renewal/review of Credit limits: -3- Cir.No BC-CST Regular and adhoc credit limits need to be reviewed/regularised not later than three months from the due date/date of adhoc sanction. In case of constraints such as nonavailability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limit is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence an account, where the regular/adhoc credit limits have not been reviewed/renewed within 180 days (not 90 days) from the due date/date of adhoc sanction shall be treated as NPA. Ex.1: If a regular OD limit, the validity of which has expired on 31 st July, is not renewed or reviewed upto 26 th January, it will slip to NPA on 26 th January. Ex.2: If adhoc sanction given on 31 st July is not renewed or reviewed upto 26 th January, it will slip to NPA on 26 th January Advances, which need not be classified as NPA: Advances against Term Deposits, NSC, KVP/IVP etc:: Advances against Term Deposits, NSC, and KVP/IVP etc inclusive of accrued interest if any, NSCs eligible for surrender, Indira Vikas Patras, Kisan Vikas Patras and SV (Surrender Value) of life insurance policies shall not be treated as NPAs. Such securities are exempt from provision requirement to the extent so covered by such securities and hence they shall be classified as Standard assets only. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. These are to be classified as per the normal procedure applicable to other loans Explanation with examples: Loans repayable in installments: a). A loan repayable in instalments becomes NPA when interest and /or instalments of principal remain overdue for a period of more than 90 days. Therefore 91 st day from the due date of earliest unpaid interest or installment of principal is the date of NPA. Illustrations: i). If interest due for the month ended 30th September is not paid, it becomes NPA on 29 th December. ii) If interest due for the month ended 31 st October is not paid, it becomes NPA on 29 h January. iii). If instalment towards principal due on 15 th October is not paid, it becomes NPA on 13 th January. (..4)

4 -4- b). Branches shall recover monthly interest on the due dates i.e. last day of the month. However, for the purpose of asset classification, interest debited at the end of a month, other than quarter ending month, shall be deemed as overdue on the last day of the quarter only. In other words, if interest debited to an account at the end of January, February, April, May, July, August, October and November is not paid, the same shall be deemed as overdue from the end of the quarter, for the purpose of asset classification and the account shall be classified as NPA if the interest is not paid within 90 days from the end of the quarter. Illustration: If interest due on is not paid, it becomes NPA on (interest is deemed to be overdue on and becomes NPA after 90 days i.e. on ) Special cases: Equated monthly instalments: In the case of loans repayable in equated monthly instalments where a part of the interest is included in the instalment, NPA status shall be determined on the basis of non payment of equated monthly instalments and not with reference to the date of debit of monthly interest Education Loans: As per the scheme guidelines prescribed by the Government of India, the repayment is to be made in 5-7 years after the completion of course period + one year or six months after getting the job whichever is earlier. Interest is also payable along with the instalment. Hence the Education loans shall be treated as NPAs if the same is overdue for more than 90 days from the due date as explained above Staff Housing/Vehicle Loans: In the case of housing /vehicle loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first month onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of installment of principal or payment of interest on the respective due dates Advance Payments : Where the borrower has made advance payment of instalments fixed towards the loan and as on the loan account is regular such loan account need not be treated as NPA even if technically interest is due for more than 90 days Overdraft/Cash Credit: An Overdraft/Cash Credit account shall be treated as NPA, if it remains out of order for 90 days. Balance in BG Paid account, if any, shall be added notionally to OD/CC/Current Account and the sum shall be compared with sanction limit/drawing power, whichever is less, to determine whether the balance outstanding was in excess of sanctioned limit/drawing power. (..5)

5 -5- Eg.1. If liability under Overdraft/Cash Credit (after notionally adding devolved Liability Under BG paid account) remains continuously in excess of sanctioned limit or drawing power, whichever is less, on all days during the period to , it becomes NPA on (i.e. continuously overdrawn for 90 days). Eg.2. If Current account (after notionally debiting devolved liability under BG paid Account) is continuously in debit balance on all days during the period to , it becomes NPA on (i.e. continuously overdrawn for 90 days) in cases where the outstanding balance in the principal operating account i.e. OD/CC account is less than the sanctioned limit or drawing power, whichever is less, 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, from the beginning i.e. 1 st Jan. In other words, the account shall be treated as out or order for 90 days as on 31 st March and hence slips to NPA on the date of Balance Sheet i.e. 31 st March. Eg.1. If an Overdraft/Cash Credit account is within limit and drawing power but there are no credits continuously (from 2 nd January to 31 st March in the case of leap years and 1 st January to 31 st March in case of other years), the account becomes NPA on 31 st March (i.e. no credits continuously for 90 days). Eg.2. If an overdraft/cash credit account is within limit and drawing power but the credits received during the period (from 2nd January to 31 st March in case of leap years and 1 st January to 31 st January to 31 st March in the case of other years i.e. interest debited during the period is not covered by credits received during the period) the account becomes NPA on 31 st March The outstanding in an account based on drawing power calculated from stock statements older than 3 months would be deemed as irregular. An OD/CC account will become NPA if such irregular drawings permitted in the account for a continuous period of 90 days. Eg. Drawals permitted during November against drawing power based on stock statement as on 31 st July or before are irregular. Drawals permitted during December against drawing power based on stock statement as on 31 st August or before are irregular. If such irregular drawals are permitted in an account continuously for 90 days, the account becomes NPA on 90 th day. In the above case, if drawals are permitted during November based on stock statement on 31 st July or before, during December based on stock statement as on 31 st August or before and during January based on stock statement as on 30 th September or before and during January based on stock statement as on 30 th September or before, the account will slip to NPA on 29 th January An account where the regular/adhoc Credit limits have not been reviewed/renewed within 180 days (not 90 days) from the due date/date of adhoc sanction shall be treated as NPA. (..6)

6 -6- Eg.1: If a regular OD limit, the validity of which has expired on , is not renewed or reviewed up to , it will slip to NPA on Eg.2: If ad-hoc sanction given on is not renewed/reviewed upto , it will slip to NPA on Bills Purchased/Discounted: A Bill purchased/discounted shall be treated as NPA, if it remains overdue for a period of more than 90 days. Eg: A cheque discounted (CDD) on becomes due for payment on (expected to be realized within 7 days). It becomes NPA on (i.e. more than 90 days from the due date0) if it remains unpaid Agricultural loans-pragathi Kisan Credit Card: PKCC facility being in the nature of advance for agricultural purposes, the prudential norms as applicable to Agricultural advances would apply to PKCC accounts Other accounts: Any other credit facility shall be treated as NPA if any amount to be received remains overdue for a period more than 90 days. The type of accounts which fall under other accounts are Bank Guarantee (BGF) Paid, Debit balance in SB account including debit balance occurred in SB/CA on account of debit of bills under credit card, JL where installment is not stipulated, etc. (JL where installment is fixed should be treated as loan and not as other accounts ) General Guidelines: Accounts where there is erosion in the value of security/frauds committed by Borrowers: i). In respect of account where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers, it will not be prudent that such accounts should go through various stages of asset classification, In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate. ii). Branches shall classify accounts, where fraud has been identified, as loss asset and recommend provision accordingly. iii). Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank/approved valuers/nabard at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. (..7)

7 -7- iv). If the realizable value of the security, as assessed by the bank/approved valuers/nabard at the time of last inspection, is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset Asset classification to be borrower-wise and not facility-wise: It is difficult 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 the Bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA and not the particular facility/investment or part thereof which has become irregular. Eg: If one facility of a borrower/one investment in any of the securities issued by the borrower is Standard asset, the second is a Sub-standard and the third is Doubtful above 3 years, then all the facilities/investments shall be classified as Doubtful above 3 years. However, if one account of a borrower is Doubtful above three years and the second account is a loss asset, then both the accounts shall be classifieds as Doubtful above 3 years Exceptions (where borrower-wise classification is not applicable): i). Agricultural loans of Farmers in Distress : In case of agricultural loans rescheduled during under scheme for Relief to Farmers in Distress, Income Recognition and Asset Classification (IRAC) norms would be applicable from the 3 rd year onwards, i.e. on expiry of the initial moratorium period of two years, while the fresh loans extended would be governed by the IRAC norms as applicable to agricultural loans. In other words, the restructured/rescheduled loan shall be treated as NPA, if the principal or interest thereon remains overdue for two crop seasons in case of loans granted for short duration crops and one crop season in case of long duration crops, after the expiry of two years. ii).agricultural loans of Farmers in Arrears : In case of agricultural NPAs restructured/rescheduled during under the Scheme for relief to Farmers in Arrears the existing classification of the loan account restructured/rescheduled continued in the same asset category but fresh loans granted to them were treated as Standard Asset. iii). Agricultural loans through FSCS: In respect of agricultural advances as well as advances for other purposes granted by bank to FSCS under the on-lending system, only that particular credit facility granted to FSCS which is in default, for a period of 2 crop seasons in case of short during crops and one crop season in case of long duration crops., as the case may be, after it has become due, shall be classified as NPA and not all the credit facilities granted to the FSCS. (..8)

8 -8- However, other direct loans and advances, if any, granted by the bank to the member borrower of FSCS outside the on-lending arrangement, will become NPA even if one of the credit facilities granted to the same borrower becomes NPA Borrower dealing with more than one branch: If a borrower is enjoying credit facilities in more than branch, the branch where the main accounts are maintained shall determine the asset classification, after collecting required information about the conduct of the account at other branches and communicate the asset classification and allocation of securities to the other branches. The other branches shall classify the account accordingly Asset Classification of Suit Filed/DICGC Claims Lodged accounts: There cannot be any standard asset under Suit filed and DICGC claim lodged accounts. Hence the entire suit filed accounts and DICGC claim Lodged accounts shall be treated as NPA and shall be further classified into Sub- standard/ Doubtful/Loss assets. For determining the date of NPA, the conduct of the accounts prior to the date of filing of suit/claim shall be taken into account Jewel Loans: If interest is not serviced/recovered on any JL account before 90 days after the completion of one year of arranging the Jewel Loan, such account shall be classified as NPA Sub-classification of Non Performing Assets: Non Performing Assets shall be classified as Sub-standard, Doubtful and Loss assets based on date of NPA/other parameters Sub-standard Assets: The stay-in-period of sub-standard category was reduced to 12 months with effect from Further SSA shall be segregated in to Secured Exposure and Unsecured Exposure for the purpose of determining the rate of provision. Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/nabard Inspecting officers, is not more than 10 per cent, ab initio, of the outstanding exposure. Exposure shall include all funded and nonfunded exposures (including underwriting and similar commitments). Security means tangible security property charged to the Bank and will not include intangible securities like guarantees, comfort letters etc. Therefore all clean loans and loans with security less than 10% under sub-standard category may be treated as Unsecured Exposure Doubtful Assets: i). A Doubtful asset is one, which has remained NPA for a period exceeding 12 months. Doubtful Assets shall be classified into following categories. (..9)

9 -9- a). DA-1 : Doubtful Assets upto one year (NPAs exceeding 12 months but upto 2 years. b). DA-2 : Doubtful Assets above 1 year and upto 3 years (NPAs exceeding 2 years but upto 4 years) c). DA-3 : Doubtful Assets above 3 years (NPAs beyond 4 years). ii). Further each Doubtful asset shall be bifurcated into secured portion and unsecured portion for provisioning purpose Loss Assets: A Loss Asset is one where the loss has been identified by the bank or external auditors or NABARD inspectors. Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. An asset may become uncollectible due to serious credit impairment, frauds, non-availability of security, erosion in value of security etc. For identification of Loss assets, following 3 conditions are to be satisfied. a). Account is classified as NPA ( age of the NPA is not the criteria) b). Realizable value of the security is NIL/Negligible. c). The account is identified as bad/irrecoverable by the branch/ho/inspection officials/auditors/nabard inspectors. If the realizable value of the security, as assessed by the Bank/approved valuer is less than 10% of the out standings in the borrowal accounts, the existence of the security should be ignored and the asset should be straightaway classified as loss asset If any one of the three conditions (a,b,c) are not fulfilled the account should not be treated as loss asset. Note: An unsecured/clean loan, which has slipped to NPA, need not be classified as Loss asset merely because it is unsecured. Such accounts may be classified as Sub Standard asset with 20% provision for one year and doubtful asset with 100% provision after completion of one year as NPA Accounts where asset classification has been changed by Auditors/NABARD Inspectors/Head Office: Where asset classification assigned by the branch was changed by Statutory Auditors/NABARD Inspectors/Head Office and the changed classification was communicated to branches, branches shall recommend the changed asset classification unless the account has been upgraded as Standard asset or the asset classification as per branch is lower than the changed asset classification communicated by Head Office. (..10)

10 Eg:1. Assume that a). Branch had treated an account as Standard Asset as on b). The asset classification is changed to Sub-standard Asset by the Statutory Auditors/NABARD inspectors/head Office. c). The asset classification as per branch as on is Standard Asset In this case branch shall recommend classification as Doubtful-1 asset and recommend provision accordingly, unless the irregularity observed by the Auditors/NABARD Inspectors/HO is fully rectified and the account is regular in all respects. Eg.2.Assume that a). branch had treated an account as Substandard as on b). The asset classification is changed to DA-2 by the auditors/nabard Inspectors/HO (may be due to deterioration/erosion in value of security) and provision made accordingly. c). The asset classification as per branch as on is DA-1. In this case branch shall recommend asset classification as DA-2 and recommend provision accordingly. However, if the asset classification as per branch as on is DA-3 which is lower than the asset classification assigned by the Statutory Auditors/NABARD Inspectors, then branch shall recommend asset classification as DA-3 and recommend increased provision accordingly Valuation of land & building, plant & machinery, vehicles etc The collaterals such as immovable properties charged in favour of the Bank should be got valued once in 2 years by approved valueres. i). The securities, primary or collateral, such as land and building, plant and machinery, Vehicles, etc., obtained as security for advances of Rs.2.00lakhs and above shall be got valued through the approved valuer once in 2 years. Branches should ensure that the valuation given by the approved valuer on land and building, plant & machinery etc. is realistic. However, this stipulation is exempted in case of Housing Loans, which are classified as Standard Assets. ii). In the case of advances against hypothecation of goods the value of the security should be updated by obtaining latest stock statements. Date of receipt shall be recorded by putting date stand on stock statement. In the case of Bill liability, realizable value of goods covered under documents of title to goods shall be ascertained and kept on record. (..11)

11 1.17. Verification of securities: -11- Cir.No BC-CST It is essential that securities charged to the bank are inspected at periodic intervals. Branches shall conduct the inspection of all securities charged to the bank such as stocks, vehicles, plant and machinery, equipment, land and buildings etc., and maintain record of inspection of securities Treatment of security for the purpose of provisioning: i). Where a borrower enjoys more than one credit facility, the realizable value of the security shall be first reduced to the extent of outstanding liability under the credit facility to which it is taken as primary security and the surplus value of the security, if any, can be taken notionally as security for the unsecured portion of other credit facilities of the same borrower for calculation of provision. ii). Where the security is not taken as primary security to any of the credit facilities but treated as a common security to all the facilities, realizable value of such common security shall be apportioned on pro rata basis to cover the clean portion under each account. iii). In the case of pari passu charge, realizable value of security shall be taken on prorata basis. In the case of second/third charge, realizable value of security minus liability with first/second charge holder alone shall be taken into account Income Recognition: Income from NPAs should not be recognized on accrual basis but shall be booked as income only when it is actually received. Therefore, once an account is transferred from PA to NPA, interest shall not be debited to the account at monthly intervals or on due dates. Similarly fees, commission and similar income shall not be debited on accrual basis. As and when credits are received, fees/commission/interest/other income due in the account or actual amount received, whichever is less, shall be debited to the account and credited to Misc. income/interest on NPA Interest Reversal: The unrecovered portion of fees/commission/interest/other income debited during the current year and corresponding previous year, in fresh NPA accounts shall be reversed at the end of the quarter in which the account is transferred from PA to NPA. The unrecovered portion of interest in Fresh NPAs, to be reversed, shall be ascertained by Minimum Balance Method explained and illustrated in Annexure-II Appropriation of Recovery in NPAs: Repayment received in NPAs shall be appropriated to Expenses, interest and Principal in that order. However, where One Time Settlement has been sanctioned, the repayment received shall be appropriated first towards Principal, then to Expenses and remaining to Interest. (..12)

12 PROVISION Based on the Asset Classification of the borrowal accounts the provisioning requirements shall be computed for all the advances. S.No. Asset Classification % of Provision to be made 1. STANDARD ASSETS : a). Direct advances to Agriculture &Small and Medium 0.25* Enterprises (SME) b). Residential Housing Loans beyond Rs.20 lakh 1.00* c). Personal Banking Loans 2.00* d). All other advances not included in (a), (b) & (c) 0.40* *(As the general provision will be made at Head Office level, branches need not calculate provision amount in respect of Standard Asset at branch level) 2. Substandard Asset (On the balance outstanding without making any allowance for security or DICGC guarantee cover available a). Secured Exposure under SSA* 10% B). Unsecured Exposure under SSA * 20% * Unsecured/Secured Exposure is defined in Para No.2.15, 1 3. Doubtful Asset (on the book balance) i) On secured liability a) Doubtful upto 1 year 20 % b) Doubtful for above 1 year but upto 3 year 30 % c). Doubtful above 3 years 100% ii. on secured / unsecured liability covered by DICGC Nil Claims received iii) On secured / unsecured liability not covered by DICGC claim received 4. Loss Asset: (on the Book Balance minus DICGC claim Received) NOTE: 100 % 100 % As per RBI guidelines advances against Term Deposits, NSC, IVP, KVP and SV of Life Insurance Policies are exempt from provisioning requirement provided the advances are fully covered by such securities. Further while computing provisioning requirements on doubtful assets guaranteed by DICGC, the realizable value of the security should be deducted first from the balance outstanding before DICGC Guarantee is offset. (..13)

13 In the case of NPAs where decision has been taken for accepting the compromise proposal involving writing off of book balance, which exceeds the provision made as per prudential norms as above, then provision maybe made for such exceeded amount as a measure of prudence Treatment to be given while computing provision requirement in the case of DICGC Claim lodged but not settled accounts: Branches are aware that our Bank has opted out from DICGC Scheme. Our claims lodged However, some of our claims lodged prior to , both under Small Loans Guarantee Scheme 1971 and Small Loans (SSI) Guarantee Scheme 1981, are still not settled by the Corporation (DICGC) and treated as rejected and closed the claim. Therefore, while computing provision requirement in respect of accounts where claims are pending with DICGC but not settled provision shall be made as usual like any other account ignoring the pending claim. However in respect of accounts where claims have been settled and amount received from DICGC the same may be taken in to account while computing provision. Further, while computing provisioning requirement on doubtful assets guaranteed by DICGC the realizable value of the security should be deducted first from the balance outstanding before DICGC guarantee is off set CALCULATION OF PROVISION ILUSTRATIONS: Substandard Asset Ex1: A. Book Balance outstanding in Real account Rs.2,00,000 B.Realisable Value of Security Rs.1,00,000 C.DICGC Claim Received Rs.1,20,000 D.Total Provision required:10% of A (Secured Exposure) Rs.20,000 Ex2: A. Book Balance outstanding in Real account Rs.2,00,000 B.Realisable Value of Security NIL C.DICGC Claim Received Rs.1,20,000 D.Total Provision required:20% of A (Secured Exposure) Rs.40,000 Note :Ignore realisable value of security, and amount of DICGC claim received available/claim lodged/claim received while computing provision on substandard assets Doubtful Asset : While arriving at the provision for Doubtful assets, realizable value of the securities shall be deducted from the outstanding balance first to arrive at the unsecured liability. DICGC cover at applicable percentage shall be deducted from unsecured liability to arrive at the unsecured uncovered liability. Provision shall be calculated at applicable percentage for secured liability 100% for unsecured uncovered liability as illustrated below: (..14)

14 -14- Case 1 Case 2 A. Book Balance outstanding in the Real A/c as on 2,00,000 2,00, after making interest reversal, if any B. Realisable Value of security 3,00,000 60,000 C. Net Balance ( A-B ) Nil 1,40,000 D. Applicable percentage of DICGC Cover available on C above (say 75%) in case of DICGC claim already received Nil 1,05,000 Note: If DICGC claim already received is more than D above the claim amount shall be restricted to the amount equivalent to D only. If for any account DICGC Claim is lodged but the same is not yet settled, the same should be ignored and cover available be treated as NIL. E. Unsecured liability (C-D) Nil 35,000 Provision Required for DA-1: ii) On secured portion a) Secured Liability B or A whichever is less 2,00,000 60,000 b) Provision : 20 % 40,000 12,000 ii) On unsecured portion : 100 % of E Nil 35,000 Total Provision required 40,000 47,000 Provision Required for DA-2: iii) On secured portion a) Secured Liability B or A whichever is less 2,00,000 60,000 b) Provision : 30 % 60,000 18,000 ii) On unsecured portion : 100 % of E Nil 35,000 Total Provision required 60,000 53,000 Provision for Doubtful Assets above 3 years iv) On secured portion a) Secured Liability B or A whichever is less 2,00,000 60,000 b) Provision : 100 % For NPAs on DA-3 2,00,000 60,000 ii) On unsecured portion : 100 % of E Nil 35,000 Total Provision required 2,00,000 95,000 Loss Asset: 100% provision shall be made after deducting DICGC Claim received from the balance outstanding. A. Book Balance outstanding in the account as on after 3,00,000 making interest reversal, if any. Amount of DICGC claim received, cover available / claim lodged claim 1,50,000 received / or claim received and adjusted say 50% of a B. Net Balance (A-B) 1,50,000 C. Total Provision required 100% of C 1,50,000 (..15)

15 Existing provision: The provision held for NPAs as on ( after audit corrections) should be taken as existing provision in Ret.1 and Ret.3 as on Net Advances/Net NPAs Net Advances and Net NPAs shall be arrived at as follows. Net Advances = Gross Advances minus DICGC claim Received minus provision made for NPAs Net NPAs = Book Balance outstanding in NPA ACCOUNT (Credit balance in DICGC Claim Received account +Provision) Provision for Personal Banking Loans: The loans which are being sanctioned for Demand Loan (Contingencies) i.e. Children s education, medical expenses, marriages etc., where creation of asset does not take place, such loans shall be treated as Clean Advances and necessary provision shall be made as applicable to unsecured advances, unless these loans are secured by collateral security, if any. 4.RESTRUCTURING/RESCHEDULING OF ADVANCES & ASSET CLASSIFICATION. 4.01Restructuring/Rescheduling of Advances: Loans and advances extended by the Bank may become irregular due to genuine difficulties viz. Delay in implementation of the project, delay in commencement of commercial production, bottlenecks in production and/or distribution, natural calamities and other factors which are beyond the control of the borrowers. In such genuine cases, the borrowers may be assisted to overcome the difficulties by restructuring the credit facilities or rescheduling/rephrasing terms of repayment with or without interest concession Restructuring of credit facilities normally involve conversion of short-term loans into term loans, conversion of working capital finance into term loans, waiver/funding of overdue interest etc. Rescheduling/rephrasing normally involve increase in moratorium period, increase in repayment period, postponement of instalments, revision of amount of instalments etc Restructuring/rescheduling/rephrasing in all cases should be based on viability, rehabilitation potential and cash flows of the borrower. Branches shall not resort to restructuring/rescheduling/rephasing for the purpose of avoiding slippage to NPA. (..16)

16 Asset classification of restructured/rescheduled/rephrased advances: RBI has stipulated different norms for asset classification of restructured / rephrased / rescheduled agricultural and other loans and advances. Branches shall strictly adhere to these norms, furnished below, for asset classification of restructured/rescheduled/rephased loans and advances General Guidelines: i). Asset Classification of Sub-standard asset after specified period: The substandard asset, which has been subjected to restructuring/rescheduling, would be eligible to be upgraded to standard asset after the specified period, subject to restructuring/rescheduling, would be eligible to be upgraded to standard asset after the specified period, subject to satisfactory performance during the period. If satisfactory performance is not evidenced during the period, the asset classification of the restructured sub-standard asset would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. ii) Restructuring of credit facilities extended to traders: As trading involved only buying and selling of commodities, and the problems associated with the manufacturing units such as bottleneck in commercial production, time and cost escalation etc., are not applicable to them, the rescheduling/rephasement shall be discouraged. iii). Relevant date of asset classification after restructuring: Branches shall not restructure/reschedule borrowal accounts with retrospective effect. The asset classification, status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring/rescheduling/renegotiation. iv). Repeated Restructuring: Branches shall not restructure/reschedule accounts repeatedly unless there are very strong and valid reasons that warrant such repeated restructuring/rescheduling. v). Request for Restructuring: Normally restructuring cannot take place unless alteration/changes in the original loan agreement are made with the formal consent/application of the borrower. However, the process of restructuring can be initiated by the branch in deserving cases subject to customer agreeing to the terms and conditions. (..17)

17 vi). Security: -17- While assessing the extent of security cover available to the restructured/rescheduled credit facilities, collateral securities would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in intangible form like guarantee etc., of the promoter/others. vii). Funded Interest Income Recognition in respect of the NPAs, regardless of whether these are or are not subjected to rescheduling/restructuring, should be done strictly on cash basis, only on realization and not if the amount of overdue interest has been funded. If, however, the amount of funded interest is recognized as income, a provision for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognized, as income, should be fully provided for. viii). Reversal of Provision: Provision made for NPAs shall be reversed when the account becomes a standard asset. However, the provision made towards interest sacrifice, can be reversed only on satisfactory completion of all repayment obligations and the outstanding in the account is fully repaid. Branches shall not re-compute the extent of sacrifice each year and make adjustments in the provisions made towards interest sacrifice Restructured/Rescheduled Agricultural Advances: Scheme for relief to farmers affected by Natural Calamities: Where natural calamities impair the repaying capacity of agricultural borrowers, banks may extend, on their own, following relief measures. a). Conversion of short-term production loan due in the year of occurrence of natural calamity into a term loan or reschedulement of the repayment period suitably. b). Reschedule/postpone installments of existing term loans keeping in view the repaying capacity and nature of natural calamity. c). Provide fresh crop loans and term loans for development purpose. Where relief in the form of conversion/reschedulement of loans is extended to farmers, term loan as well as fresh short term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by revised terms and conditions. (..18)

18 Package of Relief measures for debt stressed farmers: a) Package of relief measures is extended for the debt stressed farmers in 25 districts of Andhra Pradesh. All the 5 districts in the area of operation of our Bank are identified for extending the relief measures. Under the package, entire interest on overdue loans as on was waived, the overdue loans are rescheduled over a period of 3-5 years with one year moratorium and fresh finance may be ensured to them. b). Where relief is extended to farmers under the above package, the term loan as well as fresh short term loan may be treated as current dues and need not be classified as NPAs Restructured Rescheduled Advances other than Industrial and Agricultural Advances: Branches may consider accounts, other than industrial and agriculture advances i.e. housing, personal loans, loans to traders/business enterprises/professionals etc., for restructuring/rescheduling/rephasing provided such accounts qualify the basic test of viability, rehabilitation, potential and cash flows of the borrower However, these accounts would not qualify for the special asset classification status available to restructured/rescheduled/rephased industrial or agricultural advances, but would continue to age and migrate to the next asset classification status in the normal course. In other words, the asset classification of these accounts shall be based on the original terms of repayment If concession in rate of interest is permitted as per the rephased terms, branches shall compute and recommend provision for the amount of sacrifice in interest, measured in present value terms These restructured/rescheduled accounts would be eligible to be upgraded to standard category after a period or one year after that date when first payment of interest or of principal, whichever is earlier, falls due under the revised terms subject to satisfactory performance during that period. The amount of provision made for NPA, net of the amount provided, for the sacrifice in interest in present value terms as aforesaid, could be reversed after the one-year period. Eg: 1). A PBS loan, which was Substandard as on 31 st December (date of NPA-15 th December) is rescheduled/rephrased during January. EMIs are due from 1 st February as per the rephased terms. The account will be continued to be Substandard upto 14 th December next year and will slip to Doubtful-1 on 15 th December next year. Account can be upgraded as Standard asset on 1 st Feb next year, provided all instalments and interest as per rephased terms are paid by the borrower. (..19)

19 Eg.2: Housing loan, which will become NPA on 30 th November (overdue from 1 st September) is rescheduled/rephased on 15 th November i.e. before the account has slipped to NPA. EMIs are due from 1 st January as per rephased terms. The account shall be classified as sub-standard from 30 th November to 29 th November next year and Doubtful-1 from 30 th November next year. It may be upgraded to Standard in January next year subject to payment all EMIs as per rephased terms UPGRADATION OF LOAN ACCOUNTS CLASSIFIEDS AS NPA Upgradation: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as standard. In other words, an account, which became NPA due to non-payment of interest and/or instalments of principal, upon payment of arrears of interest and/or instalments of principal in full, stands upgraded as Standard Asset on the day of clearing the arrears in full Accounts classified as NPA get upgraded to Performing Asset any day during the year by recovery or otherwise. Eg: i). Entire arrears of interest and instalments of loan account are paid and account is fully regularized. ii). Overdrawal allowed in OD/CC account has been regularized or the party has started operating the account within limit/drawing power. iii).in case of account classified as NPA on account of other account/s of borrower being NPA, and such other account/s are upgraded/closed. iv). In case of a NPA, so classified for non-submission of stock statement, non-renewal of limits etc., account is regularised by submission of stock statements or limit is renewed or reviewed In case of a borrower having multiple accounts, the accounts can be upgraded as standard asset only if all accounts of the borrower are regular on the day of upgradation Regularisation of account for upgradation: Accounts shall be regularized by genuine credits for upgrading the account from NPAs to standard assets. Regularisation of accounts by allowing temporary OD/adhoc limit, rephasement of instalments, conversion of loan, discounting/purchasing of accommodation cheques, transfer of funds from accounts of sister concern, other than on genuine trade/business related transaction, etc shall not allow the account to be upgraded as standard asset. (..20)

20 ACCOUNTING PROCEDURE-NON PERFORMING ASSETS Income Recognition: Income from Non-performing assets is not recognized on accrual basis but is booked as income only when it is actually received. Therefore interest on NPAs shall be charged to the account only when it is actually received. As and when recovery is made in NPAs, expenses incurred but not charged to the accounts shall be debited to the account and credited to Miscellaneous. Income first. Balance of recovery made or interest upto the end of previous month not charged to the account whichever is less shall be debited to the account and credited to interest on NPA. After debiting the expenses and interest to the NPA (Real account), balance in Real account shall not exceed the balance in shadow account since balance in shadow account is the total dues of the borrower Interest Reversal: In the case of accounts which are already classified as NPA as on and continue to be NPA as on , the question of interest reversal as on does not arise as interest is being collected in such cases as and when the recovery is received and the same is appropriated towards the interest.. As per the guidelines when a borrowal account is classified as NPA for the first time as at the end of an accounting year, the unrecovered portion of interest debited to the borrowal account and credited to the income account in the previous accounting year as well as in the current accounting year should be reversed. Therefore, in the case of all loans and advances, non-operative overdraft accounts and other accounts which were classified as performing /standard assets last year as on but which are now classified as non-performing assets (NPA) as on , branches shall first debit interest on accrual basis for the month ending Thereafter, the unrecovered portion of the interest debited during the year as well as during (i.e. entire interest arrears in the account) shall be reversed by passing the following entries separately for and DEBIT: Interest on Advances ( or IOL) CREDIT: Loan/Non operative O.D/other accounts of the borrower. (..21)

21 Operative NPOD accounts classified as existing NPAs: Branches are advised to debit the interest reversal made as on to all operative accounts on and to continue to debit monthly interest on accrual basis during the current year. This procedure is laid down to ensure that credits received in the operative NPOD accounts, during the current year are appropriated towards interest first. The un recovered portion of interest, if any, in those accounts as on shall be reversed by passing following entries: Debit : Interest income on NPAs. Credit : Operative NP Overdraft account of the borrower. The unrecovered portion of interest in operative NPOD account shall be ascertained as under. a). Total interest debited to NPOD a/c during the year (Including the interest debited to operative OD account on pertaining to interest reversal made for :Rs. b). Less: Total credits received during :Rs. c). Unrecovered portion of interest (a-b) :Rs Operative NPOD accounts slipped during current year (New NPAs): In the case of operative overdraft accounts classified as NPAs for the first time as at the end of the current year, branches shall first debit interest on accrual basis upto the end of March2008. Thereafter, the unrecovered portion of interest debited during and shall be reversed by passing the following entries Debit : Interest income on Performing Assets (or IOL) Credit : Operative Overdraft account of the borrower Bills: In the case of cheques, drafts, bills discounted which are classified as NPA, the question of reversal of interest as at the end of year does not arise as interest on overdue bills is not debited and not taken into income account unless collected in Cash. However Branches shall calculate interest receivable (compounded monthly) on all overdue bills outstanding as at the end of the current year and pass the following contra entries. Debit : Interest Receivables on Overdue Bills A/c Credit: Unrealized interest on overdue Bills A/c The contra entries already passed at the end of the previous year shall be reversed Transfer of PAs to NPAs: i). Outstanding balance, after interest reversal in accounts which have slipped to NPA on shall be transferred to NPL/NPOD/NPB etc., on by passing the following entries. (..22)