JAIIB PPB Paper-2 Module-B Unit 7: Non-Performing Assets/ Stressed Assets

16/03/2023

JAIIB Paper 2 (PPB) Module B Unit 7: Non-Performing Assets/ Stressed Assets (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 7: Non-Performing Assets/ Stressed Assets. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 7: Non-Performing Assets/ Stressed Assets of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Introduction

In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts.

The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof.

Definition

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. Non-performing Asset (NPA) shall be an advance 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 remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Out of Order’ status

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 six months 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.

Income Recognition

Income recognition – Policy

The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.

Reversal of income

If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks’ global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure.
While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

Computation Of Gross Advances, Gross NPA, NET Adavances, And NET NPA

Banks are required to compute Gross Advances, Net Advances, Gross NPAs and Net NPAs, as per the prescribed format.

a)Gross advances = Standard Assets plus Gross NPA

b)Gross NPA as percentage of Gross advances = Gross NPA/Gross advances (in%)

c)Net advances = Gross advances minus Deductions (see D below)

d)Deductions

Provisions held in the case of NPA accounts (including prescribed additional provisions)
DICGC/ECGC claims received and held pending adjustment
Part payment received and kept in Suspense Account or any other similar account
Balance in Sundries Account (Interest Capitalization – Restructured Accounts), in respect of NPA accounts
Floating Provisions

e)Net NPA = Gross NPA minus Deductions (listed above)

f)Net NPAs as percentage of Net Advances = Net NPAs/Net advances (in%)

Gross NPAs = Principal dues of NPAs plus Funded Interest Term Loan (FITL) where the corresponding contra credit is parked in Sundries Account (Interest Capitalization – Restructured Accounts), in respect of NPA Accounts.
‘Gross Advances’ mean all outstanding loans and advances including advances for which refinance has been received but excluding rediscounted bills, and advances written off at Head Office level (Technical write off).
Floating Provisions would be deducted while calculating Net NPAs, to the extent, banks have exercised this option, over utilising it towards Tier II capital.

Asset Classification

Categories of NPAs

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

Sub-standard Assets
Doubtful Assets
Loss Assets

Sub-standard Assets

With effect from 31 March 2005, a sub-standard asset is one, which has remained NPA for a period less than or equal to 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 banks in full.
In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

Doubtful Assets

With effect from 31 March 2005, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 12 months.
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
In other words, 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.

Guidelines for classification of assets

Accounts with temporary deficiencies

The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:

Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 180 days even though the unit may be working or the borrower’s financial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/ review of credit limits 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/ 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.

Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part thereof which has become irregular.
If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning.

Advances against Term Deposits, NSC’s, KVP/IVP, etc

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes ‘due’ only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected.
In the case of housing 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 quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates

Provisioning Norms

Loss assets

The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

Doubtful assets

100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has been considered as doubtful –Provision requirement (%)

Up to one year -25
One to three years- 40
More than three years- 100

Sub-standard assets

A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets

From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.25 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but shown separately as ‘Contingent Provisions against Standard Assets’ under ‘Other Liabilities and Provisions – Others’ in Schedule 5 of the balance sheet.

Advances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made as illustrated hereunder:

Note: The maximum amount insured by DICGC is 5 lakh earlier Rs.100000

Framework For Resolution Of Stressed Assets

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:

Lenders are required to report credit information, including classification of an account as SMA to Central CRILC, on all borrowers having aggregate exposure of `5 crore and above with them.

− The CRILC-Main Report shall be submitted on a monthly basis.

− In addition, the lenders shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of `5 crore and above).

Implementation of Resolution Plan

Applicability

The provisions of the directions on the subject issued by RBI shall apply to the following entities:

Scheduled Commercial Banks (excluding Regional Rural Banks);
All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);
Small Finance Banks; and,
Systemically Important Non-Deposit taking NBFCs (NBFC-ND-SI) and Deposit taking NBFCs (NBFC-D).

Lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines. Lenders are required to initiate the process of implementing a resolution plan (RP) even before a default. Salient steps in this regard are as follows:

− Once a borrower is reported to be in default by any of the lenders, to undertake a prima facie review of the borrower account within 30 days from such default (“Review Period”).

− The lender may decide on the resolution strategy, or choose to initiate legal proceedings for insolvency or recovery.

− Where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the Review Period.

− The ICA shall provide that any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of lenders by number shall be binding upon all the lenders.

− In particular, the RPs shall provide for payment not less than the liquidation value due to the dissenting lenders.

− RP shall be implemented within 180 days from the end of Review Period.

− The Review Period shall commence not later than:

The reference date, if in default as on the reference date; or
The date of first default after the reference date.

The reference dates for the above purpose shall be as under:

(* Scheduled Commercial Banks (excluding Regional Rural Banks), All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI) and Small Finance Banks)

− The RP may involve any action/ plan/ reorganization including, but not limited to –

Regularisation of the account by payment of all overdues by the borrower entity,
Sale of the exposures to other entities/ investors,
Change in ownership and restructuring.

Implementation Conditions for RP

RPs involving restructuring/ change in ownership in respect of accounts where the aggregate exposure of lenders is `100 crore and above, shall require independent credit evaluation (ICE) of the residual debt by authorised credit rating agencies (CRAs).

A RP in respect of borrowers to whom the lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the prescribed conditions are met.
A RP which involves lenders exiting the exposure by assigning the exposures to third party or a RP involving recovery action shall be deemed to be implemented only if the exposure to the borrower is fully extinguished.

Delayed Implementation of Resolution Plan

Where a viable RP in respect of a borrower is not implemented within the timelines given below, all lenders shall make additional provisions as under:

Other Aspects

Prudential Norms: The prudential norms applicable to any restructuring/change in ownership, whether under the IBC framework or outside the IBC prescribed by RBI to be followed.
Supervisory Review: Any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory actions.
Disclosures: Lenders shall make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to RPs implemented.
Exemptions: Provisions related to RP are not applicable to revival and rehabilitation of MSMEs that are covered by separate guidelines. These provisions are not applicable for borrower entities in respect of which specific instructions were issued by RBI to the banks for initiation of insolvency proceedings under the IBC.

JAIIB PPB Module B Unit 7 Non-Performing Assets Stressed Assets (Ambitious Baba) PDF