Summary: Receivables, crucial assets for any organization, become problematic when deemed uncollectible, termed as “Bad Debts” in general and “Non-Performing Assets” (NPAs) in banking. An account is classified as an NPA when overdue for over 90 days, with sub-categories including Special Mention Accounts (SMA) for overdue periods ranging from 30 to 90 days. NPAs are categorized into Sub-Standard Assets (overdue up to 18 months), Doubtful Assets (overdue beyond 18 months), and Loss Assets (to be written off). Provisioning for NPAs is mandated by RBI norms, with Sub-Standard Assets requiring a 10% provision, Doubtful Assets needing provisions of 20% to 50% based on the duration overdue, and Loss Assets requiring 100% provisioning. Key points include classification based on recovery records, borrower-wise asset classification, and specific provisions for government-guaranteed advances. Proper asset management entails recording interest only upon realization, not during moratorium periods, and annual reporting of NPAs.
Receivables are one of the major and important assets of any organization. It is the right of the organization towards the money receivable by them for the goods sold or services rendered. When an entity estimates that a receivable may not be recovered by the entity, such receivable is called a ‘Bad Debt’.
In the case of banking companies, this bad debt is termed as Non-Performing Asset.
In this article, we shall read about when an asset is treated as Non-Performing Asset (NPA), what are the classifications of NPA and what are the provisioning requirements.
Non-Performing Assets (NPA)
Before learning about NPA, it is important to learn about Special Mention Accounts (SMA).
SMA are the accounts that are overdue for more than 30 days. The classification is as follows,
(i) SMA 0 – When the account is overdue for up to 30 days.
(ii) SMA 1 – When the account is overdue for more than 30 days up to 60 days.
(iii) SMA 2 – When the account is overdue for more than 60 days up to 90 days.
When any account remains overdue for more than 90 days, such accounts are to be classified as NPA. The NPA definition as per the RBI prudential norms are as follows,
An account is classified as an NPA when,
(i) Interest and/or principal remain overdue for more than 90 days in respect of a term loan,
(ii) Account remains out of order for more than 90 days in case of an overdraft or cash credit account,
(iii) When a bill remains overdue for more than 90 days in case of bill discounting or bill purchase,
(iv) When the receivable becomes overdue for 2 crop seasons in the case of agricultural loans,
(v) Any other account which remains overdue for more than 90 days.
NPA Categories
NPA is categorized into three types which are as follows,
(i) Sub-Standard Assets – Assets that remain as NPA for up to 18 months.
(ii) Doubtful Assets – Assets which remain as NPA for more than 18 months.
(iii) Loss Assets – Assets that are identified by the management to be written off.
Provisioning Requirements
As per the Prudential Norms, every bank must provide for the NPAs, based on the categories of the NPAs. Provisions are to be provided as follows,
(i) Sub-standard Assets – To be provided at the rate of 10%.
(ii) Doubtful Assets – The provisions to be provided are as follows,
| Doubtful up to 1 year – | 20% |
| Doubtful for 1 – 3 years – | 30% |
| Doubtful for more than 3 years – | 50% |
(iii) Loss Assets – Loss assets are to be provided for at 100%.
Important Points Regarding NPAs
- NPA Classification is to be done based on the record of recovery and not merely due to the existence of some temporary deficiencies such as the non-availability of adequate drawing power based on the latest stock statements, non-submission of stock statements, etc.
- Drawing power is to be derived based on the stock statements (Includes Current Assets) which should not be older than 3 months.
- Asset classification is to be done borrower wise and not account wise. All accounts relating to a single borrower are to be classified as an NPA.
- When the realizable value of security is less than 50% of the asset realized value estimated by the bank and approved by RBI, there is said to be a significant erosion in the value of security. In such cases, the asset is to be straight away classified as a doubtful asset.
- Similarly, when the realizable value of security is less than 10% of the value estimated by the bank, the asset is to be directly classified as a loss asset.
- In cases of advances provided against the security of Term Deposits, such advances need not be necessarily classified as an NPA.
- NPA classification is to be done only after the due date of interest payments and not during the moratorium period.
- In the case of Government Guaranteed Advances, it is to be classified as NPA only when the Government repudiates its guarantee.
- Interest in such NPAs is to be reversed immediately when the asset is classified as NPA.
- Interest income on NPA is to be recorded only when the interest is realized.
- Fees/Commissions on such NPA accounts are not to be accrued and are to be recorded only upon actual realization.
- Every year, banks should report about the NPAs held by them in the prescribed annexure.
- When a bank records interest on NPAs under the Interest Suspense Account, the same should be netted off with the NPA balance while reporting the same to RBI.
- When an interest suspense account is not maintained by the bank, such an amount should be disclosed as a footnote to the annexure.
This was a basic understanding of the NPA classification, categorization, and provisioning in the case of Banks.
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