Final Accounts of Banking Companies- NPA Norms

Following are the important Final Accounts of Banking Companies as per Banking Regulation Act 1949 and its latest Amendments and Reserve Bank of India’s Circulars.

1. Balance Sheet

2. Profit and Loss Account

Now, Banks need not follow Ind AS. The relevant position is as follows.

On 1st April 2019 – Mandatory Basis — (as postponed by RBI)

(a) Scheduled commercial Banks, excluding RRBs

(b) India term-lending refinancing institution i.e. Exim bank, NABARD etc.

(c) Holding, subsidiary, joint venture or associate companies of scheduled commercial banks

I. Balance Sheet as at 31st March

(000s omitted)

Schedules referred to above form an integral part of the Balance Sheet

II.Profit and Loss Account for the year ended 31st March

(000s omitted)

The schedules referred to above form an integral part of the Profit & Loss Account.

III. Non-performing Assets and Provisions

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

A nonperforming asset (NPA) is a loan or an advance where;

i. interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan,

ii. the account remains ‘out of order’ as indicated at paragraph 2.2 below, 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. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,

vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021.

vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Categories of NPAs

Banks are required to classify nonperforming 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:

(i) Substandard Assets

(ii) Doubtful Assets

(iii) Loss Assets

Substandard Assets

With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

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.

Upgradation of loan accounts classified as NPAs

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’ accounts.

PROVISIONING NORMS

Loss assets

Loss assets should be written off. If loss 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:

Substandard assets

A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.

The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance

Standard assets

The provisioning requirements for all types of standard assets stands as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:

a) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;

b) advances to Commercial Real Estate (CRE)1 Sector at 1.00 per cent;

c) advances to Commercial Real Estate – Residential Housing Sector (CRE – RH)2 at 0.75 per cent

d) housing loans extended at teaser rates as indicated in Paragraphs 5.9.9;

e) restructured advances – as stipulated in the prudential norms for restructuring of advances.

f) Advances restructured and classified as standard in terms of the Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs, as updated from time to time, at 5%.

g) All other loans and advances not included in (a) – (f) above at 0.40 per cent.

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.