IRAC Norms.pdf

IRAC and Prudential Norms as per RBI Guidelins

1. Banks are Advised
for Automation
of NPAAccounts
by 30 June 2021

2. IRAC NORMS -INTRODUCTION
❖InlinewiththeinternationalpracticesandOn
recommendations ofNarsimham Committee on
FinancialSectorReformsPRUDENTIALACCOUNTING
NORMShavebeenImplementedinBanks.
❖PRUDENTIALACCOUNTING NORMS
➢IncomeRecognition
➢AssetClassification
➢Provisioning

3. PRUDENTIAL NORMS
❖Thepolicyofincomerecognitionshouldbeobjectiveandbasedon
recordofrecoveryratherthanonanysubjectiveconsiderations.
❖Likewise,theclassificationofassetsofbankshastobedoneonthe
basisofobjectivecriteriawhichwouldensureauniformandconsistent
applicationofthenorms.
❖Also,theprovisioningshouldbemadeonthebasisoftheclassification
ofassetsbasedontheperiodforwhichtheassethasremainednon-
performingandtheavailabilityofsecurityandtherealisablevalue
thereof.
❖Banksareurgedtoensurethatwhilegrantingloansandadvances,
realisticrepaymentschedulesmaybefixedonthebasisofcashflows
withborrowers.
❖Thiswouldgoalongwaytofacilitatepromptrepaymentbytheborrowers
andthusimprovetherecordofrecoveryinadvances.

4. AUTOMATION OF IRACNORMS AND
PROVISIONING PROCESSES IN BANKS
➢BankswereadvisedtohaveappropriateITsysteminplacefor
identificationofNon-PerformingAssets(NPA)andgenerationofrelated
data/returns,bothforregulatoryreportingandbank’sownMIS
requirements.
➢ItwasobservedthattheprocessesforNPAidentification,income
recognition,provisioningandgenerationofrelatedreturnsinmany
banksarenotyetfullyautomated.
➢NowRBIissuedcircularDatedSeptember14,2020onAutomationof
IncomeRecognition,AssetClassificationandProvisioningprocessesin
banks.
➢InordertoensurethecompletenessandintegrityoftheautomatedAsset
Classification,ProvisioningcalculationandIncomeRecognition
processes,banksareadvisedtoputinplace/upgradetheirsystemsto
conformtothefollowingguidelineslatestbyJune30,2021.

5. As per the norms coverage are as under:
➢Allborrowalaccounts,includingtemporaryoverdrafts,irrespectiveofsize,sectoror
typesoflimits,shallbecoveredintheautomatedITbasedsystem(System)forasset
classification,upgradation,andprovisioningprocesses.Banks’investmentsshallalso
becoveredundertheSystem.
➢AssetclassificationrulesshallbeconfiguredintheSystem,incompliancewiththe
regulatorystipulations.
➢CalculationofprovisioningrequirementshallalsobeSystembasedasperpre-setrules
forvariouscategoriesofassets,valueofsecurityascapturedintheSystemandany
otherregulatorystipulationsissuedfromtimetotimeonprovisioningrequirements.
➢Inaddition,incomerecognition/derecognitionincaseofimpairedassets(NPAs/NPIs)
shallbesystemdrivenandamountrequiredtobereversedfromtheincomeaccount
shouldbeobtainedfromtheSystemwithoutanymanualintervention.
➢Frequency:TheSystembasedassetclassificationshallbeanongoingexerciseforboth
down-gradationandup-gradationofaccounts.Banksshouldensurethattheasset
classificationstatusisupdatedaspartofdayendprocess.

6. DEFINITION OF NPA
Anassetbecomesnon-performingwhenitceasesto
generateincometotheBank,incaseof:-
1.LoanA/c(DLorTL)-Interestand/orinstallmentofprincipal
remainOVERDUE(whennotpaidontheduedatefixedbythe
Bank)foraperiodofmorethan90Days.
2.CashCreditorOverdraftA/c-Thea/cremainOUTOFORDER*
foraperiodofmorethan90days.
(i)TheBalanceiscontinuouslymorethanS/LorD/Lor
(ii)WhereasondateofBS,thereisnoCREDITinthea/c
continuouslyfor90daysorcreditislessthaninterestdebited.

7. 1.TheLimitisnotreviewedwithin180daysfromthedue
dateofrenewal.
2.Wherestockstatementhasnotbeenreceivedfor90
daysormoreincaseofCCaccounts.
3.Bills-Thebillremainsoverdueforaperiodofmore
than90daysfromduedateofpayment.
4.DirectAgriculturalloans:AccountbecomesNPAwhen;
a)Forshortdurationcrops:Interest/instalment
remainingoverduefor2cropseasons&
b)Forlongdurationcrop:interest/installmentremaining
overduefor1cropseason.
DEFINITION OF NPA

8. EXCEPTIONS
StaffLoans–exceptinexceptionallyproblematic
caseslikesuitfiledcases.
AdvancesagainstBank’sownTermDeposits,
NSCs,KVPs,IVPs,LICpoliciesaslongas
adequatemarginisavailable.
AdvanceRepayment.
However,advancesagainstgoldornamentsand
othergovernmentsecurities,sharesarenot
coveredunderthisexemption.

9. 1.ThecreditfacilitiesbackedbytheGuaranteeofCentralGovt.thoughoverdue,may
betreatedasNPAonlywhentheGovt.repudiatesitsguaranteewhenrevoked.
2.ThecreditfacilitiesbackedbytheGuaranteeofStateGovt.becomeNPAnormally.
3.Classificationwillbedoneborrower-wise&notfacility-wise.
3.IncaseofloanstoPACS/FSSclassificationwillbedonefacility-wise.
4.Inthecaseofbankfinancegivenforindustrialprojects,housingloanorfor
agriculturalplantationsetc.wheremoratoriumisavailableforpaymentofinterest,
paymentofinterestbecomes'due'onlyafterthemoratoriumorgestationperiodis
over.
5.Assetclassificationofaccountsunderconsortiumshouldbebasedontherecordof
recoveryoftheindividualmemberbanksandotheraspectshavingabearingonthe
recoverabilityoftheadvances.
SALIENT POINTS

10. Projects under implementation
ForallprojectsfinancedbytheFIs/banks,the‘DateofCompletion’andthe‘Dateof
Commencement ofCommercialOperations’(DCCO),oftheprojectshouldbeclearlyspeltoutat
thetimeoffinancialclosureoftheprojectandthesameshouldbeformallydocumented.These
shouldalsobedocumentedintheappraisalnotebythebankduringsanctionoftheloan.
Thereareoccasionswhenthecompletionofprojectsisdelayedforlegalandotherextraneous
reasonslikedelaysinGovernmentapprovalsetc.Allthesefactors,whicharebeyondthe
controlofthepromoters,mayleadtodelayinprojectimplementationandinvolverestructuring/
reschedulementofloansbybanks.Accordingly,thefollowingassetclassificationnormswould
applytotheprojectloansbeforecommencementofcommercialoperations.
Forthispurpose,allprojectloanshavebeendividedintothefollowingtwocategories:
1)ProjectLoansforinfrastructuresector
2)ProjectLoansfornon-infrastructuresector
Forthepurposeoftheseguidelines,'ProjectLoan'wouldmeananytermloanwhichhasbeen
extendedforthepurposeofsettingupofaneconomicventure.Further,InfrastructureSectoris
asectorasdefinedinextantHarmonisedMasterListofInfrastructureofRBI.

11. Ifanyadvance,includingbillspurchasedanddiscounted,
becomesNPA,theentireinterestaccruedandcredited
toincomeaccountinthepastperiods,shouldbe
reversedifthesameisnotrealised.
ThiswillapplytoStateGovernmentGuaranteed
advancesalso.
InrespectofNPAs,fees,commissionandsimilarincome
thathaveaccruedshouldceasetoaccrueinthecurrent
periodandshouldbereversedwithrespecttopast
periods,ifuncollected.
REVERSAL OF INCOME

12. ASSET CLASSIFICATION
(Standard Overdue Accounts)
BeforealoanaccountturnsintoaNPA,banksarerequiredto
identifyincipientstressintheaccountbycreatingthreesub-
categoriesundertheSpecialMentionAccount(SMA)category
asgiveninthetablebelow:
SMA
Sub-categories
Basis for classification
SMA-0 Principal or interest payment not overdue for more than 30
days but account showing signs of incipient stress
SMA-1 Principal or interest payment overdue between 31-60 days
SMA-2 Principal or interest payment overdue between 61-90 day

13. ASSET CLASSIFICATION
(NPA Accounts)
Sub-Standard-AccountwhichhasremainedinNPAcategoryforaperiodof
notmorethan12months.Astoreliabilitytheseaccountsshowcredit
weaknessandthereisdistinctpossibilitythattheBankwillsustainsome
lossifthedeficienciesarenotcorrected.
Doubtful-AccountwhichremainedinNPAcategoryformorethan12months.
AloanclassifiedasDoubtfulhasalltheweaknessesinherenttoSub-
Standardassetswithaddedcharacteristicthatthefullrecoveryofthe
advanceishighlyimprobableduetoerosionofsecurityvalueorfraudor
suchotherreasons.
LOSS-AccountwhereLOSShasbeenidentifiedbythebankorInternal
AuditorsorExternalAuditorsorbyRBIInspectorbuttheamounthasnot
beenwrittenoff.Itisanassetwhichisconsidereduncollectiblealthough
theremaybesomesalvageorrecoveryvalue.

14. NPA-ASSET CLASSIFICATION
ToDeterminethecorrectAssetClassificationofan
NPAborrowerTWOaspectsareImportant:
1.“NPASince”Dateand
2.“ValueofSecurity”
NETOUTSTANDING(NOS):TotalOutstandingless
amountofUnrealisedInterest(URI).

15. RVS DEFINITIONS
RVS:ValueofSecurity(RealisableValueofSecurity)for
thepurposeofreckoningNPAisthesumtotalofthe
amountsofsecurityavailableineachaccountofthe
borrower:
a)ValueofPrincipal(Primary)Security,
b)Valueofsecurity,otherthanPrimarySecurity,
c)ValueofCredit/CashMargin,
d)ValueofGuarantee(onlyoftheNatureofGuarantee)
Coverobtainingintheaccounti.e.,ECGC,DICGC
CGTMSE,CGFMU,CGFSELetc.

16. SUB-STANDARD ASSET CLASSIFICATION
1.WhereNPASinceDateisupto12monthsfrom
theCurrentDate:
a.AssetCodewillbedeterminedasSub-Standard(Secured),except
forasat‘b’below.
b.AssetCodewillbedeterminedasSub-Standard(Unsecured),ifthe
unsecuredportion/RVSasstipulated&ascertainedisnotmore
than10%abinitio(CleanPersonalLoan,CleanODetc).
c.AssetCodewillbedeterminedasDoubtfulI(D1),iferosionofRVS
ismorethan50%ofthevalueacceptedinthelastinspection.
d.AssetCodewillbedeterminedasLoss,iferosionofRVSismore
than90%ofthevalueacceptedinthelastinspection.

17. DOUBTFUL ASSET CLASSIFICATION
2.WhereNPASinceDateismorethan12
monthsandupto24monthsfromthe
currentdate:
a.AssetcodewillbedeterminedasDoubtfulI
(D1)iftheRVSisnotlessthan10%oftheNOS.
b.AssetcodewillbedeterminedasLoss,ifthe
RVSislessthan10%oftheNOS.

18. DOUBTFUL ASSET CLASSIFICATION
3. Where NPA since Date is more than 24 months and up to 48
months from the current date:
a.Asset code will be determined as Doubtful II (D2), if the RVS is not
less than 10% of the NOS.
b.Asset code will be determined as Loss, if the RVS is less than 10%
of the NOS.
4.Where NPA since Date is more than 48 months from the
current date:
a.Asset code will be determined as Doubtful III (D3).
b.Asset code will be determined as Loss, if the RVS is less than 10%
of the NOS.

19. CATEGORIES, CODE AND PERIODS OF
NPA ASSETS
Category Period in category
Sub-Standard (Secured) Up to 1 year from NPA date
Sub-Standard (Unsecured) Up to 1 year from NPA date
Doubtful I (D1) Above 1 year to 2 years from NPA date
Doubtful II (D2) Above 2 years to 4 years from NPA date
Doubtful III (D3) More than 4 years from NPA date
Loss No time limit

20. NPAPROVISIONING
NPA Category Provision Amount
(RBI Guide Lines)
Sub-Standard (Secured) 15% of Net Outstanding
Sub-Standard (Unsecured) 25% of Net Outstanding
UnsecuredExposuresinrespectofInfrastructureloan
accountswherecertainsafeguardssuchasEscrow
accountsareavailable
20% of Net Outstanding
Doubtful I(Fully secured by RVS) 25% of Net Outstanding
Doubtful I(Partly secured by RVS) 25% of RVS plus 100% of the unsecured
Portion (NOS less RVS)
DoubtfulII (Fully secured by RVS) 40% of netOutstanding
DoubtfulII (Partly secured by RVS) 40%of RVS plus 100% of the
Unsecured Portion (NOS less RVS)
DoubtfulIII 100% of net Outstanding
Loss 100% of net Outstanding

21. Calculation of Provision in Doubtful I (D1) Asset
AdvancescoveredbyECGCguarantee:Inthecaseofadvancesclassifiedasdoubtfuland
guaranteedbyECGC,provisionshouldbemadeonlyforthebalanceinexcessoftheamount
guaranteedbytheCorporation.Further,whilearrivingattheprovisionrequiredtobemadefordoubtful
assets,realisablevalueofthesecuritiesshouldfirstbedeductedfromtheoutstandingbalancein
respectoftheamountguaranteedbytheCorporationandthenprovisionmadeasillustratedhereunder:
OutstandingBalance Rs.4lakh
ECGCCover 50percent
AssetClassification DoubtfulID1(sayasonMarch31,2021)
Valueofsecurityheld Rs.1.50lakh
Provision required to be made
Outstanding balance Rs. 4.00 lakh
Less: Value of security held Rs. 1.50 lakh
Unrealised balance Rs. 2.50 lakh
Less: ECGCCover (50% of unrealisable balance)Rs. 1.25 lakh
Net unsecured balance Rs. 1.25 lakh
Provision for unsecured portion of advance Rs. 1.25 lakh (@ 100 percent of unsecured portion)
Provision for secured portion of advance Rs.0.375 lakh (@ 25 per cent of the secured portion)
Total provision to be made Rs.1.625 lakh (as on March 31, 2021)

22. Calculation of Provision in Doubtful II (D2) Asset
AdvancecoveredbyCGTMSE:IncasetheadvancecoveredbyCGTMSEguaranteebecomes
nonperforming,noprovisionneedbemadetowardstheguaranteedportion.Theamount
outstandinginexcessoftheguaranteedportionshouldbeprovidedforaspertheextant
guidelinesonprovisioningfornon-performingassets.Anillustrativeexampleisgivenbelow:
OutstandingBalance Rs.10lakh
CGTMSECover 75%oftheamountoutstandingor75%oftheunsecuredamount,whichever
istheleast
AssetClassificationDoubtfulIID2(sayasonMarch31,2021)
ValueofsecurityheldRs.1.50lakh
Provision required to be made
Balanceoutstanding Rs.10.00 lakh
Less:Valueofsecurity Rs. 1.50 lakh
Unsecuredamount Rs. 8.50 lakh
Less:CGTMSEcover(75%) Rs. 6.38 lakh
Netunsecuredanduncoveredportion: Rs. 2.12 lakh
ProvisionforSecuredportion@40%ofRs.1.50lakh Rs.0.60 lakh
ProvisionforUnsecured&uncoveredportion@100%ofRs.2.12lakh Rs.2.12 lakh
Totalprovisionrequired Rs.2.72 lakh

23. PROVISIONING NORMS FOR STANDARD ASSETS
(i)Theprovisioningrequirementsforalltypesofstandard
assetsstandsasbelow.Banksshouldmakegeneralprovision
forstandardassetsatthefollowingratesforthefunded
outstandingongloballoanportfoliobasis:
a)DirectadvancestoagriculturalandSmallandMicroEnterprises
(SMEs)sectorsat0.25percent;
b)AdvancestoCommercialRealEstate(CRE)Sectorat1.00percent;
c)AdvancestoCommercialRealEstate–ResidentialHousing
Sector(CRE-RH)at0.75percent;
d)Housingloansextendedatteaserratesandrestructuredadvances
asperlatestnorms;
e)Allotherloansandadvancesnotincludedin(a)(b)and(c)above
at0.40percent.

24. PROVISIONING NORMS FOR STANDARD ASSETS
(ii)Theprovisionsonstandardassetsshouldnotbereckoned
forarrivingatnetNPAs.
(iii)TheprovisionstowardsStandardAssetsneednotbenetted
fromgrossadvancesbutshownseparatelyas'Contingent
ProvisionsagainstStandardAssets'under'OtherLiabilitiesand
ProvisionsOthers'inSchedule5ofthebalancesheet.
Takeoutfinance:Thelendinginstitutionshouldmakeprovisions
againsta'takeoutfinance'turningintoNPApendingitstakeover
bythetaking-overinstitution.Asandwhentheassetistaken-
overbythetaking-overinstitution,thecorresponding
provisionscouldbereversed.

25. COMPUTATION OF NPALEVELS
BanksareadvisedtocomputetheirGross
Advances,NetAdvances,GrossNPAsandNet
NPAs,aspertheformatgivenbelow.
1)GrossAdvances=StandardAssetPlusGrossNPA
2)GrossNPAsasapercentageofGrossAdvances=Gross
NPA/GrossAdvances
3)NetAdvances=GrossAdvances-Deductions
4)Deductions=ProvisionsheldinthecaseofNPAAccounts&
RVS
5)NetNPAs=GrossNPAsminusDeductions
6)NetNPAsaspercentageofNetAdvances=NetNPAs/Net
Advances(in%).

26. GROSS & NET ADVANCES AND NPAS
Particulars Rs. in cr.
1Standard Advances 1600
2Gross NPAs 400
3Gross Advances* (1+2) 2000
4Gross NPA as a percentage of Gross Advances(2/3) (in %) 20
5Deductions 152
(i)Provisions held in the case of NPA Accounts as per asset classification 150
(ii)DICGC / ECGC /CGTMSE claims received and held pending adjustment 1
(iii)Part payment received and kept in Sundry A/c, URI or any other similar A/c1
6Net Advances(3-5) 1848
7Net NPAs{2-5 (i+ ii+ iii)} 248
8Net NPAs as percentage of Net Advances(7/6) (in %) 13.42
*ForthepurposeofthisStatement,’GrossAdvances’meanalloutstandingloansand
advancesincludingadvancesforwhichrefinancehasbeenreceivedbutexcluding
rediscountedbills,andadvanceswrittenoffatHeadOfficelevel(Technicalwriteoff).

27. For details information you may visit:
My website www.bankingdigests.com
Or RBI Circular
No. DBR.No.BP.BC.2/21.04.048/2015-16Dated July 1, 2015
Ref. No. DoS.CO.PPG./SEC.03/11.01.005/2020-21Dated September 14, 2020