Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways Nonperforming assets NPAs are recorded on a bank's balance sheet after a prolonged period of non-payment by the borrower. NPAs place financial burden on the lender; a significant number of NPAs over a period of time may indicate to regulators that the financial fitness of the bank is in jeopardy.
NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment. Lenders have options to recover their losses, including taking possession of any collateral or selling off the loan at a significant discount to a collection agency.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Nonperforming Asset A nonperforming asset is a debt obligation where the borrower has not made any previously agreed upon interest and principal repayments to the designated lender for an extended period of time.
Nonperforming Loan NPL A nonperforming loan NPL is a sum of borrowed money whose scheduled payments have not been made by the debtor for a period of time—usually 90 or days. What is a Nonaccrual Loan? A nonaccrual loan is a debt for which payment is overdue by 90 days or more. Interest is no longer accruing because no payment has been made. Classified Loan A classified loan is any bank loan that is in danger of default. Problem Loan A problem loan is a loan that the borrower cannot or is unwilling to repay according to the original loan agreement.
In other words, amounts set aside for making provision for NPAs as above are not eligible for tax deductions. Recoveries made in such accounts should be offered for tax purposes as per the rules.
However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, percent provision will have to be made therefor. Prudential Guidelines on Restructuring of Advances by Banks.
In these four sets of guidelines on restructuring of advances, the differentiation has been broadly made based on whether a borrower is engaged in an industrial activity or a non-industrial activity. In addition an elaborate institutional mechanism has been laid down for accounts restructured under CDR Mechanism. The major difference in the prudential regulations lies in the stipulation that subject to certain conditions, the accounts of borrowers engaged in industrial activities under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms continue to be classified in the existing asset classification category upon restructuring.
This benefit of retention of asset classification on restructuring is not available to the accounts of borrowers engaged in non-industrial activities except to SME borrowers. Another difference is that the prudential regulations covering the CDR Mechanism and restructuring of advances extended to SMEs are more detailed and comprehensive than that covering the restructuring of the rest of the advances including the advances extended to the industrial units, outside CDR Mechanism.
Further, the CDR Mechanism is available only to the borrowers engaged in industrial activities. Accordingly, the prudential norms across all categories of debt restructuring mechanisms, other than those restructured on account of natural calamities which will continue to be covered by the extant guidelines issued by the RPCD were harmonised in August These prudential norms applicable to all restructurings including those under CDR Mechanism are laid down in para It may be noted that while the general principles laid down in para 11 inter-alia stipulate that 'standard' advances should be re-classified as 'sub-standard' immediately on restructuring, all borrowers, with the exception of the borrowal categories specified in para The principles and prudential norms laid down in this paragraph are applicable to all advances including the borrowers, who are eligible for special regulatory treatment for asset classification as specified in para In these cases, the provisions of paras While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply.
The process of re- classification of an asset should not stop merely because restructuring proposal is under consideration.
In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern. However, the process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions. The viability should be determined by the banks based on the acceptable viability benchmarks determined by them, which may be applied on a case-by-case basis, depending on merits of each case.
Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance.
The accounts not considered viable should not be restructured and banks should accelerate the recovery measures in respect of such accounts. The restructuring of such cases may be done with Board's approval, while for such accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group only. However, in the case of accounts where the prerestructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance should be recognised only on cash basis.
If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion.
However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.
Subject to provisions of paragraphs Banks will hold provision against the restructured advances as per the existing provisioning norms. Such diminution in value is an economic loss for the bank and will have impact on the bank's market value of equity.
Such provision should be held in addition to the provisions as per existing provisioning norms as indicated in para For this purpose, the erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring.
Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring.
The above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to follow consistently by banks in future. Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions.
These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components Working Capital Term Loan and Funded Interest Term Loan would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components.
Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account. The position would be reviewed thereafter. A part of the outstanding principal amount can be converted into debt or equity instruments as part of restructuring. Further movement in the asset classification of these instruments would also be determined based on the subsequent asset classification of the restructured advance. In the case of restructured accounts classified as 'standard', the income, if any,generated by these instruments may be recognised on accrual basis.
In the case of restructured accounts classified as non-performing assets, the income,if any, generated by these instruments may be recognised only on cash basis. These instruments should be held under AFS and valued as per usual valuation norms.
Equity classified as standard asset should be valued either at market value, if quoted, or at break-up value, if not quoted without considering the revaluation reserve, if any, which is to be ascertained from the company's latest balance sheet. In case the latest balance sheet is not available the shares are to be valued at Rs 1. Equity instrument classified as NPA should be valued at market value, if quoted, and in case where equity is not quoted,it should be valued at Rs.
Depreciation on these instruments should not be offset against the appreciation in any other securities held under the AFS category. Valuation and provisioning norms would be as per para The depreciation, if any, on valuation may be charged to the Sundry Liabilities Interest Capitalisation Account.
Special Regulatory Treatment for Asset Classification. Such treatment is not extended to the following categories of advances:. The asset classification of these three categories accounts as well as that of other accounts which do not comply with the conditions enumerated in para As stated in para The process of reclassification of an asset should not stop merely because the application is under consideration.
However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell in respect of cases covered under the CDR Mechanism or when the restructuring application was received by the bank in non-CDR cases:.
Subject to the compliance with the undernoted conditions in addition to the adherence to the prudential framework laid down in para However, these benefits will be available subject to compliance with the following conditions:. The condition of being fully secured by tangible security will not be applicable in the following cases:. The aforesaid ceiling of 10 years would not be applicable for restructured home loans; in these cases the Board of Director of the banks should prescribe the maximum period for restructured advance keeping in view the safety and soundness of the advances.
However, the restructured housing loans should be risk weighted with an additional risk weight of 25 percentage points to the risk weight prescribed already. Nonetheless, banks will have to comply with the provisions of Section 19 2 of the Banking Regulation Act, The right of recompense should be based on certain performance criteria to be decided by the banks.
These relaxations have ceased to operate from July 1, ; however the same have been consolidated in Annex 6. Banks should also disclose in their published annual Balance Sheets, under "Notes on Accounts", information relating to number and amount of advances restructured, and the amount of diminution in the fair value of the restructured advances in Annex A few illustrations on the asset classification of restructured accounts are given in Annex We re-iterate that the basic objective of restructuring is to preserve economic value of units, not evergreening of problem accounts.
This can be achieved by banks and the borrowers only by careful assessment of the viability, quick detection of weaknesses in accounts and a time-bound implementation of restructuring packages.
The guidelines pertaining to Income Recognition, Asset Classification and Provisioning, and Capital Adequacy as applicable to the loans covered by the captioned scheme, are furnished below. As advised vide the circular RPCD. The balance in this account should be reflected in Schedule 9 Advances of the Balance sheet. However, the provision required under the current norms for standard assets, need not be provided for in respect of the balance in this account.
The provision made on PV basis may also be reckoned against the NPA-provisions required, consequent upon the account being treated as NPA due to the rejection of the claim.
Norms for the Accounts subjected to the Debt Relief. The last dates of payment of the three instalments will be September 30, ; March 31, and June 30, , respectively. However, no grace period is allowed for the last instalment and the entire share of the farmer is payable by June 30, The accounts subject to debt relief would stand classified as standard assets after receipt of the aforesaid undertaking from the borrowers.
Accordingly, such accounts would also attract the prudential provisioning as applicable to standard assets. For computing the amount of loss in PV terms under the Scheme, the cash flows receivable from the farmers, as per the repayment schedule vide para It may be assumed in this context that the Government's contribution would be received by June 30, The discount rate to be applied for the purpose should be the interest rate at which the loan was granted including the element of interest subsidy, if any, available from the Government.
Thus, the total provisions held would comprise the provisions required on PV basis, provision for standard assets and excess prudential provisions, if any, towards NPA.
As mentioned at para In case, however, the payments are delayed by the farmers beyond one month of the respective due dates, the outstanding amount in the relevant accounts of such farmers shall be treated as NPA. The asset classification of such accounts shall be determined with reference to the original date of NPA, as if the account had not been treated as performing in the interregnum based on the aforesaid undertaking.
On such down-gradation of the accounts, additional provisions as per the extant prudential norms should also be made. For meeting this additional provisioning requirement, the excess prudential provisions, if any, held; the amount of provisions held for standard assets as per para 3. High NPAs frequently provide an impetus to the banks to lower their interest rates on deposits thereby lowering the rate at which your investment in Fixed Deposits grows.
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