The RBI has issued the guidelines to banks for classification of assets into following categories:
Standard Assets
Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business/banks. These are loans which do not have any problems and are less risky. Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.
Sub Standard Assets
It is classified as non-performing for a period not exceeding 12 months. The account holder comes in this category when they don’t pay three installments continuously after 90 days and up to 1 year. For this category bank has made 15% provision of funds from their profit to meet the losses generated from NPA.
With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such assets will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.
Doubtful Assets
An asset that has remained an NPA for a period exceeding 12 months is a doubtful asset. These are NPA exceeding 12 months.
Under doubtful NPA there are three sub categories:
‘ D1 i.e. upto 1 year: 25% provision is made by banks.
‘ D2 i.e. upto 2 years: 40% provision is made by bank
‘ D3 i.e. upto 3 years: 100% provision made by bank.
With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Here loss is identified by the banks concerned, by internal auditors, by external auditors, or by the Reserve Bank India upon inspection. These NPA which are identified unreliable by internal inspector of bank or auditors or by RBI are termed as Loss Assets. Under this 100% provision is made.
RATES OF PROVISIONING FOR NPAS & RESTRUCTURED ADVANCES
Standard
‘ Direct advances to Agricultural and SME Sectors 0.25%
‘ Advances to Commercial Real Estate (CRE) Sector 1.00%
‘ All other Loans and Advances not included above 0.40%
Sub Standard
‘ Secured 15%
‘ Unsecured 25%
Doubtful
‘ Up to 12 months 25%
‘ 12 months to 3 years 40%
‘ More than 3 years 100%
‘ For unsecured portion of doubtful assets 100%
Loss Advances 100%
Restructured accounts earlier classified as NPA and later upgraded
to standard category
‘ In the first year from the date of up gradation 2%
Restructured accounts classified as standard advances in the first
two years from the date of restructuring ; and
‘ In cases of moratorium on payment of interest/principal after 2%
restructuring ‘ period covering moratorium and two years
thereafter
Source: RBI Website
...(download the rest of the essay above)