The Reserve Bank of India (RBI) on April 01, 2022 has re-issued the master circular on Income Recognition, Asset Classification, Provisioning and Other Related Matters – UCBs with updates instructions / guidelines on the subject issued up to March 31, 2022.
The foremost provisions of the circular are as followed:
• General
o In order to reflect a bank's actual financial health in its balance sheet and as per the recommendations made by the Committee on Financial System (Chairman Shri M. Narasimham), the Reserve Bank has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks.
o Broadly, 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. The provisioning should generally be made on the basis of the classification of assets into different categories.
o The requirements of the State Co-operative Societies Acts and / or rules made thereunder or other statutory enactments may continue to be followed, if they are more stringent than those prescribed hereby.
• Classification of Assets as Non-Performing
o A non-performing asset is a loan or an advance where:
(i) Interest and / or installment of principal remain overdue1 for a period of more than 90 days in respect of a Term Loan.
(ii) The account remains 'out of order'2 , in respect of an Overdraft / Cash Credit (OD/CC) and all other loan products being offered as an overdraft facility, including those not meant for business purposes and/or which entail interest repayments as the only credits.
(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
(iv) In the case of direct agricultural advances as listed in Annex 1, the overdue norm specified at para 2.1.3 would be applicable. In respect of agricultural loans other than those specified in Annex 1, identification of NPAs would be done on the same basis as non-agricultural advances.
(v) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
(vi) In addition, an account may also be classified as NPA in terms of certain specific provisions of this Master Circular, including inter alia paragraphs 2.2.7 and clarifications provided under the frequently asked questions (FAQs) in Annex-4.
• Agricultural Advance
(i) In respect of all direct agricultural advances, as specified in Annex 1:
a) A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.
b) A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.
(ii) For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not "long duration" crops would be treated as "short duration" crops.
(iii) The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each state.
(iv) 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.
(v) Banks should ensure that while granting loans and advances, realistic repayment schedules are fixed on the basis of cash flows / fluidity with the borrowers.
• Charging of Interest at monthly rests
(i) Banks should charge interest at monthly rests in the context of adoption of 90 days norm for recognition of loan impairment w.e.f. from the year ended March 31, 2004 and consequential need for close monitoring of borrowers' accounts.
(ii) The charging / compounding of interest on agricultural advances would be linked to crop seasons and the instructions regarding charging of interest on monthly rests shall not be applicable to agricultural advances.
(iii) Banks should take into consideration due date/s fixed on the basis of fluidity with borrowers and harvesting / marketing season while charging interest and compound the same if the loan / installment becomes overdue in respect of short duration crops and allied agricultural activities.
• Agricultural Advances - Default in repayment due to Natural Calamities
(i) Where natural calamities impair the repaying capacity of agricultural borrowers, as a relief measure,
banks may decide on their own to :
(a) convert the short-term production loan into a term loan or re-schedule the repayment period, and (b) sanction fresh short-term loans
(ii) In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as non-performing asset (NPA). The asset classification of these loans would, therefore, be governed by the revised terms and conditions and these would be treated as NPA under the extant norms applicable for classifying agricultural advances as NPAs.
• Credit facilities Guaranteed by Central / State Government
(i) The credit facilities backed by guarantee of the Central Government though overdue should not be
treated as NPA.
(ii) This exemption from classification of government guaranteed advances as NPA is not for the purpose of recognition of income.
(iii) From the year ended March 31, 2006, State Government guaranteed advance and investment in State Government guaranteed securities would attract asset classification and provisioning norms, if interest and / or principal or any other amount due to the bank remains overdue for more than 90 days, irrespective of the fact whether the guarantee have been invoked or not.
• Restructuring of advances could take place in the following stages:
i. before commencement of commercial production / operation;
ii. after commencement of commercial production / operation but before the asset has been classified as 'sub-standard';
iii. after commencement of commercial production / operation and the asset has been classified as 'sub-standard' or 'doubtful'.
• Recognition of Income on Investment Treated as NPAs
The investments are also subject to the prudential norms on income recognition. Banks should not book income on accrual basis in respect of any security, irrespective of the category in which it is included, where the interest / principal is in arrears for more than 90 days.
• Income Recognition - Policy
o The policy of income recognition has to be objective and based on the record of recovery. Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, banks should not take interest on non-performing assets to their income account on accrual basis.
o However, interest on advances against term deposits, NSCs, KVPs and life insurance policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
o 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.
o If Government guaranteed advances remain 'overdue' for more than 90 days, the interest on such advances should not be taken to income account unless the interest has been realised. This shall be applicable in cases of both Central and State Government guaranteed accounts.
o In cases of loans where moratorium has been granted for repayment of interest, banks may recognize interest income on accrual basis for accounts which continue to be classified as ‘standard’. This shall be evaluated against the definition of ‘restructured accounts’ provided at sl.no. (iii) of Annex-5 to this Master Circular.
• Provision on Standard Assets
(a) Tier -I banks should make a general provision of a minimum of 0.25 per cent on standard assets.
(b) Tier II banks shall maintain a general provision of minimum 0.40 per cent for 'standard advances'. However, direct advances to agricultural and SME sectors which are standard assets, would attract a uniform provisioning requirement of 0.25 per cent of the funded outstanding on a portfolio basis, as hitherto.
(c) Both Tier I & Tier II banks shall maintain a minimum provision of 1.00 percent in respect of advances to Commercial Real Estate Sector classified as 'standard assets'.
(d) Both Tier I and Tier II banks UCBs shall maintain a minimum provision of 0.75 percent in respect of advances to Commercial Real Estate-Residential Housing (CRE-RH)7 Sector classified as 'standard assets'.
• Finance to Individual Farmers for Agriculture and Allied Activities (Dairy, Fishery, Piggery, Poultry, Bee-keeping, etc.)
• Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on such loans] engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage).
• Loans to others [such as corporates, partnership firms and institutions] for Agriculture and Allied Activities (dairy, fishery, piggery, poultry, bee-keeping, etc.) up to an aggregate limit of 2 crore per borrower for the following purposes:
(i) Short-term loans for raising crops, i.e. for crop loans. This will include traditional/non-traditional plantations, horticulture and allied activities.
(ii) Medium & long-term loans for agriculture and allied activities (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm and development loans for allied activities).
(iii) Loans for pre-harvest and post-harvest activities viz. spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce.
(iv) Loans to farmers up to ₹50 lakh against pledge / hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not.
(v) Loans to small and marginal farmers for purchase of land for agricultural purposes.
(vi) Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral. (vii) Export credit for exporting their own farm produce.
*Disclaimer – Kindly find all the consolidated circulars in the annexure.
[Circular No. RBI/2022-23/17 DOR.STR.REC.5/21.04.048/2022-23]
