Bank Branch Statutory Audit
Bank Branch Statutory Audit
Bank Branch Statutory Audit
1
CA.S.K Dalmia
Bansal Dalmia & Co.
Ph: 98112 16310
bdc_ca2003@yahoo.co.in
Skd@bansaldalmia.com
Friends, this is an era of technology. Whatever we
are going to present you is not a new invention but
the result of the technology of copy & paste.
2
'BEFORE WE START SOME WORK,
ALWAYS ASK OURSELVES THREE
QUESTIONS :-
| Will I be successful.
3
AUDIT OF BANK BRANCHES
Section 30 – Audit
5
BANK BRANCH AUDIT IMPORTANT
PUBLICATIONS
| NIRC Publication
6
GUIDANCE NOTE ON AUDIT OF
BANKS
Ist
Edition November 1994
VIth Edition February 2009
VII th Edition March 2011
7
GUIDANCE NOTE ON AUDIT OF BANKS
(2011 EDITION)
Contd….
Contents of GN contd…..
10
RBI MASTER CIRCULAR
AN IMPORTANT UPDATE
y http://mastercirculars.rbi.org.in/
11
INCOME RECOGNITION & ASSET
CLASSIFICATION
12
13
….Master Circular Contd.
PART B
Prudential guidelines on Restructuring of Advances
16 Disclosures
17 Illustrations
18 Objective of Restructuring
PART C
Agricultural Debt Waiver and Debt Relief Scheme,
2008 (ADWDRS)- Prudential Norms on Income Recognition,
Asset Classification, Provisioning, and Capital Adequacy
19 The background
20 Prudential Norms for the Borrowal Accounts
Covered under the ADWDRS
21 Subsequent Modifications to the Prudential Norms
15
16
17
18
MITRA COMMITTEE ON LEGAL
ASPECTS OF BANKS FRAUDS
20
…..Contd.
| External Frauds :-
Deposits –
¾ Money Laundering
¾ Fraudulent instructions
¾ Counterfeit currency
Lending –
¾ Impersonation & false information on loan applications
¾ Fraudulent valuations
¾ Misappropriation of loan funds by agents / customers
21
BANKING RISKS
| Banking has became more complex
| subjected to greater Risks
Risk Control
Risk Mitigation
Risk Monitoring 22
STANDARDS ON AUDITING
23
Standards on Auditing……
24
We shall have to Divorce the habit of non
observance of Standards on Auditing.
25
STANDARDS ON AUDITING
26
….CONTD. STANDARDS ON AUDITING
27
AUDIT STAGES - 5
1) Accepting the Audit
2) Planning the Audit
3) Performing the Preliminary Audit
4) Performing the Final Audit
5) Reporting the Audit
28
STAGE –I: ACCEPTING THE AUDIT
29
Contd…
ACCEPTANCE CONTD…
30
Contd…
ACCEPTANCE CONTD…
ANNEXURE A
32
Contd…
Audit Planning Contd….
33
AUDIT PLANNING CONTD....
Audit Staff
| Identified & Made familiar with:-
Documentations to be obtained
Contd…
Audit Planning Contd….
Certification of :-
| Balance Sheet
| Profit & Loss Account
| LFAR
| Other Certificates
35
Contd…
Audit Planning Contd…..
Contd…
Audit Planning Contd….
Contd…
Audit Planning Contd….
AUDIT EXECUTION
¾ Organizational Structure,
¾ Discussion with the branch head & staff,
¾ Entire set of previous year’s signed accounts,
¾ Concurrent, Stock, Internal Audit, RBI
Inspection, System Audit & other Audit Reports,
¾ Internal Circulars, policies & guidelines of Bank,
schedule of Service Charges, Delegation of
financial powers, MIS reports generated.
41
STAGE IV- PERFORMING THE FINAL
AUDIT
| Para 20 of SA 330 “Auditor’s responses to the
assessed risks”, would be worthwhile.
Irrespective of the assessed risk of material
misstatement, the auditor shall determine &
perform substantive procedure for each class of
transactions, account balances, & disclosures.
42
Contd…
Performing the Final Audit Contd…
o Office accounts:
¾ Sundries, suspense, intermediary accounts, periodical
control returns of office accounts, scrutinize the full
ledger accounts to examine the correctness of pruning of
entries at year end (age wise & nature wise break up).
44
Contd…
Performing the Final Audit Contd…
DISCLOSURES TO ANNUAL
ACCOUNTS THROUGH NOTES TO
ACCOUNTS
To be certified by Statutory Branch Auditor:
47
AUDIT WORKING PAPERS AND
DOCUMENTATION (SA-230)
¾ Appointment Letter acceptance,
¾ Requisite declarations & indemnities,
¾ NOC from the previous Statutory Auditor,
¾ Engagement Letter,
¾ Letter of Requirements
¾ Pre Audit Meeting with Bank Officials,
¾ Bank’s Yearly Closing Instructions,
¾ Bank Audit Programme,
¾ Significant audit observations,
¾ Accounting Policies followed,
¾ Written Representations. 48
AUDIT IN CBS ENVIRONMENT
| Pressure of the management’s deadlines - tend to
approach auditing frantically, omitting/
duplicating the many audit procedures- poor
quality audit, completion delays.
49
KEY POINTS – BANK BRANCH
AUDIT
| An early start - adherence to the deadlines
| KOB.
| Effective Discussions
| Risk Assessment
Contd…
KEY POINTS CONTD….
SPECIFIC DISCLOSURES
Extent of checking
Manner of sample selection
Representations received
54
SPECIFIC ISSUES
| L/Yr MOC – Compliance.
| Analytical review :
¾ Variances (>20%-YOY) - B/S and P&L.
¾ Debit balances in Income a/c,
¾ Credit balance in Expense a/c,
¾ Debit balance in Liability a/c,
¾ Credit balance Asset a/c.
¾ Independent bank Balance Confirmations.
¾ Detailed proofing of Major B/S items.
¾ Ledger scrutiny of Suspense & Sundries a/c.
55
Contd…
SPECIFIC ISSUES CONTD…
¾ Regulatory, etc..
Contd…
AUDIT PROGRAMME CONTD…..
Monitoring
| Audit progress at the end of every day.
59
60
Dated..
Dear Sir,
¾ We are thankful to your head office to have appointed us as the statutory auditors to audit
and report on the accounts of your Branch for the year 2010-11.
¾ We have already sent our acceptance on the appointment to your Zonal Office on
09.03.2010, and hereby confirm that the audit shall be carried out in accordance with the
applicable legal provisions and the regulatory requirements, besides the applicable
authoritative pronouncements of the Institute of Chartered Accountants of India, with the
objective of expressing an opinion on the Branch financial statements. We are pleased to
confirm our understanding of this engagement by means of this letter.
¾ We will conduct our audit in accordance with the Standards on Auditing (SAs) issued by
the Institute of Chartered Accountants of India and with the requirements of the Banking
Regulation Act, 1949 and the Reserve Bank of India Act, 1934 and the guidelines issued
under the said statutes from time to time. Those Standards require that we comply with
the ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatements. An audit
involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend upon the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. An audit also includes evaluating the
appropriateness of accounting principles used and the reasonableness of the accounting
estimates made by management, as well as evaluating the overall presentation of the
financial statements.
¾ Because of the inherent limitations of an audit, together with the inherent limitations of
internal control, there is an unavoidable risk that some material misstatements may not be
detected, even though the audit is properly planned and performed in accordance with
SAs.
¾ In making our risk assessments, we consider internal control relevant to the entity’s
preparation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. However, we will communicate to you in
writing concerning any significant deficiencies in internal control relevant to the audit of
the financial statements that we have identified during the audit.
¾ For this purpose we shall have to perform sufficient tests to obtain reasonable assurance
as to whether the information contained in the accounting records and other source data is
reliable and sufficient as the basis for the preparation of the financial statements; and
whether the information is properly presented in the said statements.
¾ We wish to clarify that the responsibility for the preparation of the financial statements
including adequate disclosure is that of the Management, and this includes;
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¾ The management is also responsible for making judgments and estimates that are
reasonable and prudent, so as to give;
a true and fair view of the state of affairs of the Branch at the end of the financial
year and
of the profit or loss of the Branch for that year, and
the safeguard of the assets of the Bank/ Branch.
¾ We will conduct our audit in accordance with the auditing standards generally accepted
in India and with the requirements of law. These Standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements.
¾ An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
¾ However, having regard to the test nature of an audit, persuasive rather than conclusive
nature of audit evidence together with inherent limitations of any accounting and internal
control system, there is an unavoidable risk that even some material misstatements of
financial statements, resulting from fraud, and to a lesser extent error, if either exists, may
remain undetected.
¾ In addition to our report on the financial statements, we expect to provide you a separate
letter through Long Form Audit Report (LFAR), concerning material weaknesses in
accounting and internal control systems, which might come to our notice during our test
verifications.
¾ The responsibility for the preparation of financial statements on a going concern basis is
that of the management.
¾ We also wish to invite your attention to the fact that our audit process is subject to ‘peer
review’ under the Chartered Accountants Act, 1949. The reviewer may examine our
working papers during the course of our peer review.
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¾ We wish to complete certain audit procedures even prior to the year-end, depending
on your state of readiness and your confirming to us so that we are able to complete
the audit at an early date.
¾ In view of the severe time constraints imposed on us, we are confident you will make
available to us, within the dates stipulated, the Branch returns/statements duly completed,
pre-reviewed and duly authenticated, to enable us to furnish our reports in the form and
manner desired of us by law or by the Reserve Bank of India and not necessarily in the
form and manner prescribed by the Bank.
¾ The Branch returns on which we are expected to furnish our reports, would be the
financial statements that correspond to financial year 2010-11, basically consisting of:
the Balance Sheet with related details
the Profit & Loss Account with related details
¾ informations/ clarifications as stated in Annexure “I” to this letter in connection with our
assignment, may please also be expedited.
¾ To enable us to monitor the progress of the audit and completion of the assignment,
please indicate/mention, the actual date(s) of completion as well as handing over to us of
each statement/return/confirmation required to be prepared by you (as per the contents of
the letter of appointment sent to us), by your endorsement on each such
statement/return/confirmation; as also on the Management Representation letter required
to be furnished by you to us. This is imperative for our records and necessary action.
¾ As part of the audit process, we will expect to receive from the management, written
confirmation of the representations made to us & a written response (Para-wise), to our
requirements is imperative, and such response is to be based on your verification of
facts.
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¾ Please note that we shall be in a position to take up the audit of the financial statements
for the purpose of our report, only upon completion by you, in its entirety, of all the
returns/schedules/statements/information sought, and upon receipt of your response in
writing to this communication.
¾ We shall be grateful if you could confirm the name(s), telephone numbers and the e-mail
address of the Officer(s) designated by the Branch to comply with our requirements in
connection with the audit, so that our checking as well as the reports are expedited.
¾ We are willing to start the audit exercise from ….nd March, 2011 itself, subject to
your suitability and confirmation to be able to complete the audit exercise by 9th
April as desired by your Head Office.
¾ Please acknowledge the receipt and arrange to send us the duplicate copy of this letter
as a token of your acceptance of the Audit Engagement Letter along with your
confirmatory letter itself.
For …………………………….,
Chartered Accountants
(Regn. No ‐ ……….)
Sd/‐
Membership No. ……..
REPORT OF THE BRANCH AUDITOR TO THE STATUTORY AUDITORS
ON THE AUDIT OF ACCOUNTS OF
…………….BRANCH OF, BANK………
FOR THE YEAR 2010-11
We have audited the attached Balance Sheet of the ……….., Branch of Bank……
as at 31.3.2011 and the Profit and Loss Account of the said Branch for the year ended on
that date, which has been drawn up in conformity with Forms ‘A’ and ‘B’ respectively of
the Third Schedule to the Banking Regulation Act, 1949.
We believe that the audit evidence that we have obtained is sufficient and
appropriate to provide basis for our audit opinion.
On the basis of the audit indicated herein, and as required by the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970, and subject to the
limitations of disclosures required therein, we report as under:
Provisions/Adjustments
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h) Provision for Interest on Saving Bank Deposits beyond the cut off date.
i. Commission Income in respect of government and third party business done by the
branch has been accounted for on cash basis. Further such income is advised by
the Head Office and in absence of the working details, we are not able to verify the
accuracy and correctness of the commission so received by the branch.
ii. The Bank has accounted income of Locker rent on cash basis. .
iii. The interest income and interest expense received and paid to Head Office on
average deposits and advances could not be verified in absence of working details
thereof, as the entries are stated to have been worked out and transferred by the
Head Office.
Subject to what is stated above, the Memorandum of Changes, having effect on
the financial statements to the extent as quantified as above and to the extent not
ascertained at the Branch, including subject to other adjustments usually made at the
Central/Head Office of the Bank, in our opinion and to the best of our information and
according to the explanations given to us, and as shown by the books of the Branch and
read with the Accounting Policies of the Bank (to the extent made known to us and as
applicable to the Branch), we report that:
a) the Balance Sheet as at 31.3.2011 of the said Branch of the Bank, as authenticated
by us, subject to observations as above, is a full and fair Balance Sheet of the
Branch containing the necessary particulars and is properly drawn up so as to
exhibit a true and fair view of the affairs of the Branch as at 31.3.2011.
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b) the Profit and Loss Account authenticated by us, subject to observations as above,
shows a true balance of the profit of the Branch for the year-ended 31.3.2011.
c) we have obtained all the information and explanations, which to the best of our
knowledge and belief were necessary for the purpose of audit and have found
them to be satisfactory.
d) transactions of the Branch, which have come to our notice, have been within the
powers of the Bank.
e) the Balance Sheet and Profit and Loss Account of the Branch are in agreement
with the books of accounts.
For …………………...,
(Chartered Accountants)
(Regn No. ……..)
Sd/-
(M No. ……)
Place :
Date :
Statutory Bank Audit (F.Yr.10-11)
Banks…….
Audit Program - Advances
Advances : Remarks
List of advances in excess of 5% of total advances (ITEM 5) – Branch
List Of Advances For Rs.2.00 Crores And Above (Item 5) Branch Compare
Advance Returns With Calender Of Returns
Credit Appraisal ;
Procedure/Instructions Followed (Item 5.A) ?
Credit Facilities sanctioned beyond delegated authority Reported To CA ?
(Item 5.B)
Bank XXX,
REPLY BY BRANCH
1. Latest Reports:
For our scrutiny, the following latest reports on the
accounts of your Branch, as well as the compliance by
the Branch on the observations contained therein:
3. Accounting Policies:
We understand that there is no change, since the
preceding year, in the Bank’s Accounting Policies
adopted and applicable for the year under audit.
4. Balancing of books:
Please confirm the present status of balancing of the
subsidiary records with the relevant control accounts.
6. Deposits
(a) Overdue/matured Term Deposits:
(i) We understand that as per your H.O. circulars
and in keeping with the circulars of the RBI,
you have introduced a system for
automatic/suomoto renewal of term deposits on
maturity.
7. Advances :
REPLY BY BRANCH
(a) Please confirm whether the aggregate of the
advances as per the Branch Balance Sheet as at
31.3.20xx reconciles with the Particulars of
Advances (Portfolio) statement after including
credit card dues and making adjustments for any
foreign exchange differences (if on a
decentralized basis); as well as after considering
the unadjusted/unappropriated credit balances
(whether in specific or nominal accounts) and
requiring adjustments/netting off against the
borrowers’ accounts which would include
accounts like “Interest Suspense”, DICGC
claims Received” and unappropriated
recoveries in Advances in litigation and
subsidies (and interest thereon, to the extent
requiring adjustment).
A summary of the particulars of Advances as per
Annexure-II may be provided to us.
REPLY BY BRANCH
(vii) List of Borrowers, where one time settlement was
sanctioned, but there is a default in repayment or in
compliance of the terms thereof;
{Refer also to Paras 4.1.15 (v) (g) (i) and (ii) and
(h) of the RBI Master Circular dated 1-7-20xx,
relating to Restructuring and Rescheduling of
Loans}
8. Outstanding in Suspense/Sundries:
Please let us have a summary of the year-wise break up
of amounts:
(a) DICGC
(b) PMRY
(c) 12 odd dates data for verification of SLR (Refer
Annex A VIII)
(d) Additional Disclosures
(e) Implementation of the Ghosh and Jilani
Committee recommendations
(f) Movement Chart of NPAs and Provision of
NPAs (Refer Annexure A II)
(g) Information relating to restructuring etc., if any,
undertaken during the year
28. Investments:
In case the Branch holds any investments on
behalf of the Bank:
(a) these may be produced for physical verification
and/or evidence of holding the same be made
available.
N.D.- …………..
.
Sub :- Statutory Branch Audit 2010-11
Reg :- Physical Verification
Dear Sir,
We wish to convey that we shall be deputing our team in connection with physical
verification of followings as at the close of year i.e. 31.3.2011.
In connection with the above, please ensure that you will be getting the
verification done simultaneously, and at all locations, of the balances for the
aforesaid items and produce for our verification the following;
a) Foreign Currency parcels, if any, lying at the Branch.
b) Sealed covers containing cash, if any.
c) Petty Cash and imprest balances held with various officers.
Time/Term Deposits;
Deposits under various schemes
Travellers’ Cheques
Drafts
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We would request you to keep ready, a list of stock of all stationery in hand
of the nature and type referred to above, so that verification thereof is
conveniently carried out;
Further please ensure that the relevant registers are also up-to-date to enable us to
verify the balances therein.
2. Instruments of the above nature issued but lying in physical custody of the Branch
may also be listed and got verified.
F. External confirmations
May we request you obtain and to let us have, balance confirmation certificates in
respect of:
a) balances with other banks as at the year-end along with
b) reconciliation statements, in evidence of outstandings with such banks
(including, if any, with the Reserve Bank of India);
c) borrowings, if any, recorded at the Branch (banks/institutions)
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We shall be willing to visit you on 2nd April 2011 or the earliest date as
convenient to you subject to your sending us the confirmation in this respect.
We shall wait for your reply and the confirmation to make our program
accordingly.
Thanking You
For …………………….
( ………………… )
Partner
Master Circular - Prudential Norms on Income Recognition,
Asset Classification and Provisioning pertaining to Advances
Part A
1. GENERAL
1.1 In line with the international practices and as per the recommendations made
by the Committee on the Financial System (Chairman Shri M. Narasimham), the
Reserve Bank of India has introduced, in a phased manner, prudential norms for
income recognition, asset classification and provisioning for the
advances portfolio of the banks so as to move towards greater consistency and
transparency in the published accounts.
1.2 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. Also, the provisioning
should be made on the basis of the classification of assets based on the period for
which the asset has remained nonperforming and the availability of
security and the realisable value thereof.
1.3 Banks are urged to ensure that while granting loans and advances, realistic
repayment schedules may be fixed on the basis of cash flows with borrowers. This
would go a long way to facilitate prompt repayment by the borrowers and thus
improve the record of recovery in advances.
1.4 With the introduction of prudential norms, the Health Code-based system for
classification of advances has ceased to be a subject of supervisory interest. As
such, all related reporting requirements, etc. under the Health Code system also
cease to be a supervisory requirement. Banks may, however, continue the system at
their discretion as a management information tool.
2. DEFINITIONS
2.1.1 An asset, including a leased asset, becomes non performing when it ceases
to generate income for the bank.
2.1.2 A non performing asset (NPA) is a loan or an advance where;
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 guidelines on
securitisation dated February 1, 2006.
2.1.3 Banks should, classify an account as NPA only if the interest due and
charged during any quarter is not serviced fully within 90 days from the end
of the quarter.
2.3 ‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
on the due date fixed by the bank.
3. INCOME RECOGNITION
3.1.1 The policy of income recognition has to be objective and based on the
record of recovery. Internationally income from nonperforming assets (NPA)
is not recognised on accrual basis but is booked as income only when it
is actually received. Therefore, the banks should not charge and take to income
account interest on any NPA.
3.2.1 If any advance, including bills purchased and discounted, becomes NPA,
the entire interest accrued and credited to income account in the past
periods, should be reversed if the same is not realised. This will apply to
Government guaranteed accounts also.
3.2.2 In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be reversed
with respect to past periods, if uncollected.
3.3.1 Interest realised on NPAs may be taken to income account provided the
credits in the accounts towards interest are not out of fresh/ additional
credit facilities sanctioned to the borrower concerned.
3.3.2 In the absence of a clear agreement between the bank and the
borrower for the purpose of appropriation of recoveries in NPAs (i.e.
towards principal or interest due), banks should adopt an accounting principle
and exercise the right of appropriation of recoveries in a uniform and
consistent manner.
On an account turning NPA, banks should reverse the interest already charged
and not collected by debiting Profit and Loss account, and stop further
application of interest. However, banks may continue to record such accrued
interest in a Memorandum account in their books. For the purpose of computing
Gross Advances, interest recorded in the Memorandum account should not be
taken into account.
Banks are advised to compute their Gross Advances, Net Advances, Gross NPAs
and Net NPAs, as per the format in Annex -1.
4. ASSET CLASSIFICATION
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
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 months. In such cases, the
current net worth of the borrower/ guarantor 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 an asset will have well defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
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. A loan
classified as doubtful has all the weaknesses inherent in assets that were
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.
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. In other words, such an asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted although there
may be some salvage or recovery value.
i) Banks should ensure that drawings in the working capital accounts are covered by
the adequacy of current assets, since current assets are first appropriated in
times of distress. Drawing power is required to be arrived at based on the
stock statement which is current. However, considering the difficulties of large
borrowers, stock statements relied upon by the banks for determining drawing
power should not be older than three months. The outstanding in the account based
on drawing power calculated from stock statements older than three months, would
be deemed as irregular.
A working capital borrowal account will become NPA if such irregular drawings are
permitted in the account for a continuous period of 90 days even though the unit
may be working or the borrower's financial position is satisfactory.
ii) Regular and ad hoc credit limits need to be reviewed/ regularised not later than
three months from the due date/date of ad hoc sanction. In case of
constraints such as non-availability of financial statements and other data from
the borrowers, the branch should furnish evidence to show that renewal/ review of
credit limits is already on and would be completed soon. In any case, delay beyond
six months is not considered desirable as a general discipline. Hence, an account
where the regular/ ad hoc credit limits have not been reviewed/ renewed
within 180 days from the due date/ date of ad hoc sanction will be treated
as NPA.
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 non-
performing and may be classified as ‘standard’ accounts. With regard to
upgradation of a restructured/ rescheduled account which is classified as NPA
contents of paragraphs 11.2 and 14.2 in the Part B of this circular will be applicable.
iii) The bills discounted under LC favouring a borrower may not be classified as a
Non-performing advance (NPA), when any other facility granted to the borrower is
classified as NPA. However, in case documents under LC are not accepted on
presentation or the payment under the LC is not made on the due date by the LC
issuing bank for any reason and the borrower does not immediately make good the
amount disbursed as a result of discounting of concerned bills, the outstanding bills
discounted will immediately be classified as NPA with effect from the date when
the other facilities had been classified as NPA.
v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or
Overdraft facility from the bank, the receivables mentioned at item (iv) above may
be debited to that account on due date and the impact of its non-payment would be
reflected in the cash credit / overdraft facility account. The principle of
borrower-wise asset classification would be applicable here also, as per extant
norms.
vi) In cases where the contract provides for settlement of the current mark-to-
market value of a derivative contract before its maturity, only the current credit
exposure (not the potential future exposure) will be classified as a non-performing
asset after an overdue period of 90 days.
vii) As the overdue receivables mentioned above would represent unrealised income
already booked by the bank on accrual basis, after 90 days of overdue period, the
amount already taken to 'Profit and Loss a/c' should be reversed.
ii. If the realisable value of the security, as assessed by the bank/ approved
valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts,
the existence of security should be ignored and the asset should be straightaway
classified as loss asset. It may be either written off or fully provided for by the
bank.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and
life policies need not be treated as NPAs, provided adequate margin
is available in the accounts. Advances against gold ornaments, government
securities and all other securities are not covered by this exemption.
i. In the case of bank finance given for industrial projects or for agricultural
plantations etc. where moratorium is available for payment of interest,
payment of interest becomes 'due' only after the moratorium or gestation
period is over. Therefore, such amounts of interest do not become overdue
and hence do not become NPA, with reference to the date of debit of
interest. They become overdue after due date for payment of interest, if
uncollected.
ii. In the case of housing loan or similar advances granted to staff members where
interest is payable after recovery of principal, interest need not be considered as
overdue from the first quarter onwards. Such loans/advances should be classified
as NPA only when there is a default in repayment of instalment of principal or
payment of interest on the respective due dates.
i. A loan granted for short duration crops will be treated as NPA, if the instalment
of principal or interest thereon remains overdue for two crop seasons. A loan
granted for long duration crops will be treated as NPA, if the instalment of
principal or interest thereon remains overdue for one crop season. 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. 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. Depending upon the duration of crops raised
by an agriculturist, the above NPA norms would also be made applicable to
agricultural term loans availed of by him.
ii. Where natural calamities impair the repaying capacity of agricultural borrowers,
banks may decide on their own as a relief measure conversion of the short-term
production loan into a term loan or reschedulement of the repayment period; and
the sanctioning of fresh short-term loan, subject to guidelines contained in RBI
circular RPCD. No.PLFS.BC.6/ 05.04.02/ 200405 dated July 1, 2005.
iii. 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 NPA.
The asset classification of these loans would thereafter be governed by the
revised terms & conditions and would be treated as NPA if interest and/or
instalment of principal remains overdue for two crop seasons for short duration
crops and for one crop season for long duration crops. 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" would be treated as "short
duration" crops.
iv. The debts as on March 31, 2004 of farmers, who have suffered production and
income losses on account of successive natural calamities, i.e., drought, flood, or
other calamities which might have occurred in the districts for two or more
successive years during the past five years may be rescheduled/ restructured
by the banks, provided the State Government concerned has declared such
districts as calamity affected. Accordingly, the interest outstanding/accrued in
the accounts of such borrowers (crop loans and agriculture term loans) up to March
31, 2004 may be clubbed with the principal outstanding therein as on March 31,
2004, and the amount thus arrived at shall be repayable over a period of five
years, at current interest rates, including an initial moratorium of two years.
As regards the crop loans and agricultural term loans which have already been
restructured on account of natural calamities as per the standing guidelines,
only the overdue instalments including interest thereon as on March 31, 2004
may be taken into account for the proposed restructuring. On restructuring
as above, the farmers concerned will become eligible for fresh loans. The
rescheduled/restructured loans as also the fresh loans to be issued to the
farmers may be treated as current dues and need not be classified as NPA. While
the fresh loans would be governed by the NPA norms as applicable to agricultural
loans, in case of rescheduled/restructured loans, the NPA norms would be
applicable from the third year onwards, i.e., on expiry of the initial moratorium
period of two years.
v. In case of Kharif crop loans in the districts affected by failure of the South-
West monsoon as notified by the State Government, recovery of any amount either
by way of principal or interest during the financial year 2002-03 need not be
effected. Further, the principal amount of crop loans in such cases should be
converted into term loans and will be recovered over a period of minimum 5 years in
case of small and marginal farmers and 4 years in case of other farmers. Interest
due in the financial year 2002-03 on crop loans should also be deferred and no
interest should be charged on the deferred interest. In such cases of conversion
or re-schedulement of crop loans into term loans, the term loans may be treated
as current dues and need not be classified as NPA. The asset classification of
these loans would thereafter be governed by the revised terms and conditions and
would be treated as NPA if interest and / or instalment of principal remain overdue
for two crop seasons.
vi. While fixing the repayment schedule in case of rural housing advances granted
to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing
Finance Scheme, banks should ensure that the interest/instalment payable on such
advances are linked to crop cycles.
4.2.15.1 For all projects financed by the FIs/ banks after 28th May, 2002, the
date of completion of the project should be clearly spelt out at the time of
financial closure of the project.
There are occasions when the completion of projects is delayed for legal and other
extraneous reasons like delays in Government approvals etc. All these factors,
which are beyond the control of the promoters, may lead to delay in project
implementation and involve restructuring / reschedulement of loans by banks.
Accordingly, the following asset classification norms would apply to the project
loans before commencement of commercial operations. These guidelines will,
however, not be applicable to restructuring of advances covered under the
paragraph 14.1 of this Master Circular (Advances classified as Commercial
Real Estate exposures; Advances classified as Capital Market exposure; and
Consumer and Personal Advances) which will continue to be dealt with in terms
of the extant provisions i.e paragraph 14.1 of the circular.
For this purpose, all project loans have been divided into the following two
categories :
'Project Loan' would mean any term loan which has been extended for the purpose
of setting up of an economic venture. Banks must fix a Date of Commencement of
Commercial Operations (DCCO) for all project loans at the time of sanction of the
loan / financial closure (in the case of multiple banking or consortium
arrangements).
(i) A loan for an infrastructure project will be classified as NPA during any time
before commencement of commercial operations as per record of recovery (90
days overdue), unless it is restructured and becomes eligible for classification as
'standard asset' in terms of paras (iii) to (v) below.
(iii) If a project loan classified as 'standard asset' is restructured any time during
the period up to two years from the original date of commencement of commercial
operations (DCCO), in accordance with the provisions of Part B of this Master
Circular, it can be retained as a standard asset if the fresh DCCO is fixed within
the following limits, and further provided the account continues to be serviced as
per the restructured terms.
Up to another 2 years (beyond the existing extended period of 2 years i.e total
extension of 4 years), in case the reason for extension of date of commencement
of production is arbitration proceedings or a court case.
(b) Infrastructure Projects delayed for other reasons beyond the control of
promoters
Up to another 1 year (beyond the existing extended period of 2 years i.e. total
extension of 3 years), in other than court cases.
a. In cases where there is moratorium for payment of interest, banks should not
book income on accrual basis beyond two years from the original DCCO, considering
the high risk involved in such restructured accounts.
b. Banks should maintain provisions on such accounts as long as these are classified
as standard assets as under :
During the third and the fourth years after the 1.00%
original DCCO.
(v) For the purpose of these guidelines, mere extension of DCCO will also be
treated as restructuring even if all other terms and conditions remain the same.
(i) A loan for a non-infrastructure project will be classified as NPA during any time
before commencement of commercial operations as per record of recovery (90
days overdue), unless it is restructured and becomes eligible for classification as
'standard asset' in terms of paras (iii) to (v) below.
a. In cases where there is moratorium for payment of interest, banks should not
book income on accrual basis beyond six months from the original DCCO,
considering the high risk involved in such restructured accounts.
b. Banks should maintain provisions on such accounts as long as these are classified
as standard assets as under :
(iv) For this purpose, mere extension of DCCO will also be treated as restructuring
even if all other terms and conditions remain the same.
(ii) Any change in the repayment schedule of a project loan caused due to an
increase in the project outlay on account of increase in scope and size of the
project, would not be treated as restructuring if :
(a) The increase in scope and size of the project takes place before
commencement of commercial operations of the existing project.
(b) The rise in cost excluding any cost-overrun in respect of the original project is
25% or more of the original outlay.
(c) The bank re-assesses the viability of the project before approving the
enhancement of scope and fixing a fresh DCCP.
(d) On re-rating, (if already rated) the new rating is not below the previous rating
by more than one notch.
(iii)These guidelines would apply to those cases where the modification to terms of
existing loans, as indicated above, are approved by banks from the date of this
circular.
(i) Banks may recognise income on accrual basis in respect of the projects under
implementation, which are classified as ‘standard’.
(ii) Banks should not recognise income on accrual basis in respect of the
projects under implementation which are classified as a ‘substandard’ asset.
Banks may recognise income in such accounts only on realisation on cash basis.
Consequently, banks which have wrongly recognised income in the past should
reverse the interest if it was recognised as income during the current year or
make a provision for an equivalent amount if it was recognised as income in the
previous year(s). As regards the regulatory treatment of ‘funded interest’
recognised as income and ‘conversion into equity, debentures or any other
instrument’ banks should adopt the following:
4.2.15.7 Provisioning
While there will be no change in the extant norms on provisioning for NPAs,
banks which are already holding provisions against some of the accounts, which
may now be classified as ‘standard’, shall continue to hold the provisions and shall
not reverse the same.
Takeout finance is the product emerging in the context of the funding of longterm
infrastructure projects. Under this arrangement, the institution/the
bank financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter the outstanding in respect of such
financing in their books on a predetermined basis. In view of the timelag involved in
taking-over, the possibility of a default in the meantime cannot be ruled out. The
norms of asset classification will have to be followed by the concerned
bank/financial institution in whose books the account stands as balance sheet item
as on the relevant date. If the lending institution observes that the asset
has turned NPA on the basis of the record of recovery, it should be classified
accordingly. The lending institution should not recognise income on accrual
basis and account for the same only when it is paid by the borrower/ taking over
institution (if the arrangement so provides). The lending institution should also
make provisions against any asset turning into NPA pending its take over by taking
over institution. As and when the asset is taken over by the taking over institution,
the corresponding provisions could be reversed. However, the taking over
institution, on taking over such assets, should make provisions treating the account
as NPA from the actual date of it becoming NPA even though the account was not
in its books as on that date.
ii. Accordingly, to the extent payment has been received from the EXIM Bank, the
advance may not be treated as a nonperforming asset for asset classification and
provisioning purposes.
i. In respect of export project finance, there could be instances where the actual
importer has paid the dues to the bank abroad but the bank in turn is unable to
remit the amount due to political developments such as war, strife, UN embargo,
etc.
ii. In such cases, where the lending bank is able to establish through
documentary evidence that the importer has cleared the dues in full by depositing
the amount in the bank abroad before it turned into NPA in the books of the bank,
but the importer's country is not allowing the funds to be remitted due to political
or other reasons, the asset classification may be made after a period of one year
from the date the amount was deposited by the importer in the bank abroad.
Banks are not permitted to upgrade the classification of any advance in respect of
which the terms have been renegotiated unless the package of renegotiated terms
has worked satisfactorily for a period of one year. While the existing credit
facilities sanctioned to a unit under rehabilitation packages approved
by BIFR/term lending institutions will continue to be classified as substandard or
doubtful as the case may be, in respect of additional facilities sanctioned under
the rehabilitation packages, the Income Recognition, Asset Classification
norms will become applicable after a period of one year from the date of
disbursement.
5 PROVISIONING NORMS
5.1 General
5.1.2 In conformity with the prudential norms, provisions should be made on the
nonperforming assets on the basis of classification of assets into prescribed
categories as detailed in paragraphs 4 supra. Taking into account the time lag
between an account becoming doubtful of recovery, its recognition as such, the
realisation of the security and the erosion over time in the value of security
charged to the bank, the banks should make provision against substandard assets,
doubtful assets and loss assets as below:
i. 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.
ii. In regard to the secured portion, provision may be made on the following
basis, at the rates ranging from 20 percent to 100 percent of the secured
portion depending upon the period for which the asset has remained doubtful:
(i) The provisioning requirements for all types of standard assets stands
amended as below, with effect from November 5, 2009. Banks should make
general provision for standard assets at the following rates for the funded
outstanding on global loan portfolio basis:
(a) direct advances to agricultural and SME sectors at 0.25 per cent;
(b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
(c) all other loans and advances not included in (a) and (b) above at 0.40 per
cent
(ii) The revised norms would be effective prospectively but the provisions held at
present should not be reversed. However, in future, if by applying the revised
provisioning norms, any provisions are required over and above the level of
provisions currently held for the standard category assets, these should be duly
provided for.
(iv) The provisions on standard assets should not be reckoned for arriving at net
NPAs.
(v) 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.
The bank's board of directors should lay down approved policy regarding the level
to which the floating provisions can be created. The bank should hold floating
provisions for ‘advances’ and ‘investments’ separately and the guidelines prescribed
will be applicable to floating provisions held for both ‘advances’ & ‘investment’
portfolios.
i. The floating provisions should not be used for making specific provisions as per
the extant prudential guidelines in respect of nonperforming assets or for making
regulatory provisions for standard assets. The floating provisions can be used only
for contingencies under extraordinary circumstances for making
specific provisions in impaired accounts after obtaining board’s approval and with
prior permission of RBI. The boards of the banks should lay down an approved
policy as to what circumstances would be considered extraordinary.
iii. In terms of the Agricultural Debt Waiver and Debt Relief Scheme, 2008,
lending institutions shall neither claim from the Central Government, nor recover
from the farmer, interest in excess of the principal amount, unapplied interest,
penal interest, legal charges, inspection charges and miscellaneous charges, etc. All
such interest / charges will be borne by the lending institutions. In view of the
extraordinary circumstances in which the banks are required to bear such interest
/ charges, banks are allowed, as a one time measure, to utilise, at their discretion,
the Floating Provisions held for 'advances' portfolio, only to the extent of meeting
the interest / charges referred to above.
5.6.3 Accounting
Floating provisions cannot be reversed by credit to the profit and loss account.
They can only be utilised for making specific provisions in extraordinary
circumstances as mentioned above. Until such utilisation, these provisions can be
netted off from gross NPAs to arrive at disclosure of net NPAs. Alternatively,
they can be treated as part of Tier II capital within the overall ceiling of 1.25 % of
total risk weighted assets.
5.6.4 Disclosures
i) Substandard assets
a) 10 percent of the sum of the net investment in the lease and the unrealised
portion of finance income net of finance charge component. The terms ‘net
investment in the lease’, ‘finance income’ and ‘finance charge’ are as defined in ‘AS
19 Leases’ issued by the ICAI.
100 percent of the extent to which, the finance is not secured by the realisable
value of the leased asset. Realisable value is to be estimated on a realistic basis. In
addition to the above provision, provision at the following rates should be made on
the sum of the net investment in the lease and the unrealised portion of finance
income net of finance charge component of the secured portion, depending upon
the period for which asset has been doubtful:
The entire asset should be written off. If for any reason, an asset is allowed to
remain in books, 100 percent of the sum of the net investment in the lease and the
unrealised portion of finance income net of finance charge component should be
provided for.
(ii) As regards the additional facilities sanctioned as per package finalised by BIFR
and/or term lending institutions, provision on additional facilities sanctioned need
not be made for a period of one year from the date of disbursement.
(iii) In respect of additional credit facilities granted to SSI units which are
identified as sick [as defined in Section IV (Para 2.8) of RPCD circular
RPCD.PLNFS.BC. No 83 /06.02.31/20042005 dated 1 March 2005] and where
rehabilitation packages/nursing programmes have been drawn by the banks
themselves or under consortium arrangements, no provision need be made for a
period of one year.
5.9.2 Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs,
gold ornaments, government & other securities and life insurance policies would
attract provisioning requirements as applicable to their asset classification status.
Example
Example I
Example II
Provision Required
(as on March 31, 2005)
Unsecured &
uncovered Rs.11.25 lakh Rs.11.25 lakh (100%)
portion
Total provision
Rs. 21.25 lakh
required
Banks shall make provisions, with effect from the year ending 31 March 2003, on
the net funded country exposures on a graded scale ranging from 0.25 to 100
percent according to the risk categories mentioned below. To begin with,
banks shall make provisions as per the following schedule:
Provisioning
ECGC
Risk category Requirement (per
Classification
cent)
Insignificant A1 0.25
Low A2 0.25
Moderate B1 5
High B2 20
Very high C1 25
Restricted C2 100
Offcredit D 100
Banks are required to make provision for country risk in respect of a country
where its net funded exposure is one per cent or more of its total assets.
The provision for country risk shall be in addition to the provisions required to be
held according to the asset classification status of the asset. In the case of
‘loss assets’ and ‘doubtful assets’, provision held, including provision held for
country risk, may not exceed 100% of the outstanding.
Banks may not make any provision for ‘home country’ exposures i.e. exposure to
India. The exposures of foreign branches of Indian banks to the host
country should be included. Foreign banks shall compute the country exposures of
their Indian branches and shall hold appropriate provisions in their Indian books.
However, their exposures to India will be excluded.
Banks may make a lower level of provisioning (say 25% of the requirement) in
respect of shortterm exposures (i.e. exposures with contractual maturity of
less than 180 days).
(a) If the sale is in respect of Standard Asset and the sale consideration is higher
than the book value, the excess provisions may be credited to Profit and Loss
Account.
(b) Excess provisions which arise on sale of NPAs can be admitted as Tier II
capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets.
Accordingly, these excess provisions that arise on sale of NPAs would be eligible
for Tier II status in terms of paragraph 4.3.2 of Master Circular
DBOD.No.BP.BC.73/21.06.001/2009-10 dated February 8, 2010 on Prudential
guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy
Framework (NCAF) and paragraph 2.1.1.2.C of Master Circular
DBOD.No.BP.BC.6/21.01.002/2009-10 dated July 1, 2009 on Prudential Norms on
Capital adequacy - Basel I Framework.
The amount of liquidity facility drawn and outstanding for more than 90 days, in
respect of securitisation transactions undertaken in terms of our guidelines on
securitisation dated February 1, 2006, should be fully provided for.
i. At present, the provisioning requirements for NPAs range between 10 per cent
and 100 per cent of the outstanding amount, depending on the age of the NPAs and
the security available. Banks can also make additional specific provisions subject to
a consistent policy based on riskiness of their credit portfolios, because the rates
of provisioning stipulated for NPAs are the regulatory minimum. It has been
observed that there is a wide heterogeneity and variance in the level of
provisioning coverage ratio across different banks.
iii. Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross
non-performing assets and indicates the extent of funds a bank has kept aside to
cover loan losses. Banks are advised to compute the PCR as per the format given in
Annex – 3.
iv. Banks should achieve this norm not later than end-September 2010. Also, the
PCR should be disclosed in the Notes to Accounts to the Balance Sheet.
6.2 Structure
The guidelines to be followed by banks/ FIs while selling their financial assets to
SC/RC under the Act ibid and investing in bonds/ debentures/ security receipts
offered by the SC/RC are given below. The prudential guidelines have been
grouped under the following headings:
ii) Procedure for sale of banks’/ FIs’ financial assets to SC/ RC, including valuation
and pricing aspects.
iii) Prudential norms, in the following areas, for banks/ FIs for sale of their
financial assets to SC/ RC and for investing in bonds/ debentures/ security
receipts and any other securities offered by the SC/RC as compensation
consequent upon sale of financial assets:
c) Exposure norms
A financial asset may be sold to the SC/RC by any bank/ FI where the asset is:
(c) at least 75% (by value) of the banks / FIs who are under theconsortium /
multiple banking arrangements agree to the sale of the asset to SC/RC.
6.4. Procedure for sale of banks’/ FIs’ financial assets to SC/ RC, including
valuation and pricing aspects
(b) Banks/ FIs, which propose to sell to SC/RC their financial assets should ensure
that the sale is conducted in a prudent manner in accordance with a policy approved
by the Board. The Board shall lay down policies and guidelines covering, inter alia,
iv. Delegation of powers of various functionaries for taking decision on the sale of
the financial assets; etc.
(c) Banks/ FIs should ensure that subsequent to sale of the financial assets to
SC/RC, they do not assume any operational, legal or any other type of risks relating
to the financial assets sold.
(d) (i) Each bank / FI will make its own assessment of the value offered by the SC
/ RC for the financial asset and decide whether to accept or reject the offer.
(ii) In the case of consortium / multiple banking arrangements, if 75% (by value) of
the banks / FIs decide to accept the offer, the remaining banks / FIs will be
obligated to accept the offer.
(e) Banks/ FIs may receive cash or bonds or debentures as sale consideration for
the financial assets sold to SC/RC.
(f) Bonds/ debentures received by banks/ FIs as sale consideration towards sale of
financial assets to SC/RC will be classified as investments in the books of banks/
FIs.
(g) Banks may also invest in security receipts, Pass-through certificates (PTC), or
other bonds/ debentures issued by SC/RC. These securities will also be classified
as investments in the books of banks/ FIs.
6.5. Prudential norms for banks/ FIs for the sale transactions
(a) (i) When a bank / FI sells its financial assets to SC/ RC, on transfer the same
will be removed from its books.
(ii) If the sale to SC/ RC is at a price below the net book value (NBV) (i.e., book
value less provisions held), the shortfall should be debited to the profit and loss
account of that year.
(iii) If the sale is for a value higher than the NBV, the excess provision will not be
reversed but will be utilized to meet the shortfall/ loss on account of sale of other
financial assets to SC/RC.
(iv) When banks/ FIs invest in the security receipts/ pass-through certificates
issued by SC/RC in respect of the financial assets sold by them to the SC/RC, the
sale shall be recognised in books of the banks / FIs at the lower of:
The above investment should be carried in the books of the bank / FI at the price
as determined above until its sale or realization, and on such sale or realization, the
loss or gain must be dealt with in the same manner as at (ii) and (iii) above.
(b) The securities (bonds and debentures) offered by SC / RC should satisfy the
following conditions:
(i) The securities must not have a term in excess of six years.
(ii) The securities must carry a rate of interest which is not lower than 1.5% above
the Bank Rate in force at the time of issue.
(iv) The securities must provide for part or full prepayment in the event the SC /
RC sells the asset securing the security before the maturity date of the security.
(vi) Whenever the security is transferred to any other party, notice of transfer
should be issued to the SC/ RC.
Banks/ FIs, which sell their financial assets to an SC/ RC, shall be required to
make the following disclosures in the Notes on Accounts to their Balance sheets:
Details of financial assets sold during the year to SC/RC for Asset Reconstruction
a. No. of accounts
c. Aggregate consideration
(a) SC/ RC will also take over financial assets which cannot be revived and which,
therefore, will have to be disposed of on a realisation basis. Normally the SC/ RC
will not take over these assets but act as an agent for recovery for which it will
charge a fee.
(b) Where the assets fall in the above category, the assets will not be removed
from the books of the bank/ FI but realisations as and when received will be
credited to the asset account. Provisioning for the asset will continue to be made
by the bank / FI in the normal course.
In order to increase the options available to banks for resolving their non
performing assets and to develop a healthy secondary market for nonperforming
assets, where securitisation companies and reconstruction companies are not
involved, guidelines have been issued to banks on purchase / sale of NonPerforming
Assets. Since the sale/purchase of nonperforming financial assets under
this option would be conducted within the financial system the whole process of
resolving the non performing assets and matters related thereto has to be
initiated with due diligence and care warranting the existence of a set of clear
guidelines which shall be complied with by all entities so that the process of
resolving nonperforming assets by sale and purchase of NPAs proceeds on smooth
and sound lines. Accordingly guidelines on sale/purchase of nonperforming
assets have been formulated and furnished below. The guidelines may be placed
before the bank's /FI's /NBFC's Board and appropriate steps may be taken for
their implementation.
Scope
7.1 These guidelines would be applicable to banks, FIs and NBFCs purchasing/
selling non performing financial assets, from/ to other
banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies).
Structure
7.4 The guidelines to be followed by banks purchasing/ selling nonperforming
financial assets from / to other banks are given below. The guidelines have been
grouped under the following headings:
7.5 Procedure for purchase/ sale of non performing financial assets, including
valuation and pricing aspects
e) Accounting policy
ii) While laying down the policy, the Board shall satisfy itself that the bank has
adequate skills to purchase non performing financial assets and deal with them in
an efficient manner which will result in value addition to the bank. The Board
should also ensure that appropriate systems and procedures are in place to
effectively address the risks that a purchasing bank would assume while engaging
in this activity.
iii) Banks should, while selling NPAs, work out the net present value of the
estimated cash flows associated with the realisable value of the available
securities net of the cost of realisation. The sale price should generally not be
lower than the net present value arrived at in the manner described above. (Same
principle should be used in compromise settlements. As the payment of the
compromise amount may be in instalments, the net present value of the settlement
amount should be calculated and this amount should generally not be less than the
net present value of the realisable value of securities.)
iv) The estimated cash flows are normally expected to be realised within a period
of three years and at least 10% of the estimated cash flows should be realized in
the first year and at least 5% in each half year thereafter, subject to full
recovery within three years.
vi) Banks should ensure that subsequent to sale of the non performing financial
assets to other banks, they do not have any involvement with reference to assets
sold and do not assume operational, legal or any other type of risks relating to the
financial assets sold. Consequently, the specific financial asset should not enjoy the
support of credit enhancements / liquidity facilities in any form or manner.
vii) Each bank will make its own assessment of the value offered by the purchasing
bank for the financial asset and decide whether to accept or reject the offer.
x) Banks shall sell nonperforming financial assets to other banks only on cash basis.
The entire sale consideration should be received upfront and the asset can be
taken out of the books of the selling bank only on receipt of the entire sale
consideration.
xi) A nonperforming financial asset should be held by the purchasing bank in its
books at least for a period of 15 months before it is sold to other banks. Banks
should not sell such assets back to the bank, which had sold the NPFA.
(xii) Banks are also permitted to sell/buy homogeneous pool within retail non-
performing financial assets, on a portfolio basis provided each of the non-
performing financial assets of the pool has remained as nonperforming financial
asset for at least 2 years in the books of the selling bank. The pool of assets would
be treated as a single asset in the books of the purchasing bank.
xiii) The selling bank shall pursue the staff accountability aspects as per the
existing instructions in respect of the nonperforming assets sold to other banks.
7.6. Prudential norms for banks for the purchase/ sale transactions
(ii) The asset classification status of an existing exposure (other than purchased
financial asset) to the same obligor in the books of the purchasing bank will
continue to be governed by the record of recovery of that exposure and hence
may be different.
(iii) Where the purchase/sale does not satisfy any of the prudential
requirements prescribed in these guidelines the asset classification status of the
financial asset in the books of the purchasing bank at the time of purchase shall be
the same as in the books of the selling bank. Thereafter, the asset classification
status will continue to be determined with reference to the date of NPA in the
selling bank.
i) When a bank sells its nonperforming financial assets to other banks, the same
will be removed from its books on transfer.
ii) If the sale is at a price below the net book value (NBV) (i.e., book value less
provisions held), the shortfall should be debited to the profit and loss account of
that year.
iii) If the sale is for a value higher than the NBV, the excess provision shall not be
reversed but will be utilised to meet the shortfall/ loss on account of sale of other
nonperforming financial assets.
For the purpose of capital adequacy, banks should assign 100% risk weights to the
nonperforming financial assets purchased from other banks. In case the non-
performing asset purchased is an investment, then it would attract capital charge
for market risks also. For NBFCs the relevant instructions on capital
adequacy would be applicable.
The purchasing bank will reckon exposure on the obligor of the specific financial
asset. Hence these banks should ensure compliance with the prudential credit
exposure ceilings (both single and group) after reckoning the exposures to the
obligors arising on account of the purchase. For NBFCs the relevant instructions on
exposure norms would be applicable.
Banks which purchase nonperforming financial assets from other banks shall be
required to make the following disclosures in the Notes on Accounts to their
Balance sheets:
C.The purchasing bank shall furnish all relevant reports to RBI, CIBIL etc. in
respect of the nonperforming financial assets purchased by it.
8.3 Therefore, the banks should either make full provision as per the guidelines or
write-off such advances and claim such tax benefits as are applicable, by evolving
appropriate methodology in consultation with their auditors/tax consultants.
Recoveries made in such accounts should be offered for tax purposes as per the
rules.
Banks may writeoff advances at Head Office level, even though the relative
advances are still outstanding in the branch books. 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, 100 percent provision will have to be
made therefor.
PART B
9. Background
9.2 Since the principles underlying the restructuring of all advances were identical,
the prudential regulations needed to be aligned in all cases. 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
2008. These prudential norms applicable to all restructurings including those under
CDR Mechanism are laid down in para 11. The details of the institutional /
organizational framework for CDR Mechanism and SME Debt Restructuring
Mechanism are given in Annex-4.
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 14.1 below ( i.e consumer and personal advances,
advances classified as capital market and real estate exposures), will be entitled to
retain the asset classification upon restructuring, subject to the conditions
enumerated in para 14.2.
9.3 The CDR Mechanism (Annex 4) will also be available to the corporates engaged
in non-industrial activities, if they are otherwise eligible for restructuring as per
the criteria laid down for this purpose. Further, banks are also encouraged to
strengthen the co-ordination among themselves in the matter of restructuring of
consortium / multiple banking accounts, which are not covered under the CDR
Mechanism.
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 14. In these cases, the provisions of
paras 11.1.2, 11.2.1 and 11.2.2 would stand modified by the provisions in para 14.
11.1.1 Banks may restructure the accounts classified under 'standard', 'sub-
standard' and 'doubtful' categories.
11.1.3 Normally, restructuring can not take place unless alteration / changes in the
original loan agreement are made with the formal consent / application of the
debtor. However, the process of restructuring can be initiated by the bank in
deserving cases subject to customer agreeing to the terms and conditions.
11.1.4 No account will be taken up for restructuring by the banks unless the
financial viability is established and there is a reasonable certainty of repayment
from the borrower, as per the terms of restructuring package. 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. Any restructuring done without
looking into cash flows of the borrower and assessing the viability of the projects
/ activity financed by banks would be treated as an attempt at ever greening a
weak credit facility and would invite supervisory concerns / action.
11.1.5 While the borrowers indulging in frauds and malfeasance will continue to
remain ineligible for restructuring, banks may review the reasons for classification
of the borrowers as wilful defaulters specially in old cases where the manner of
classification of a borrower as a wilful defaulter was not transparent and satisfy
itself that the borrower is in a position to rectify the wilful default. 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.
11.1.6 BIFR cases are not eligible for restructuring without their express approval.
CDR Core Group in the case of advances restructured under CDR Mechanism / the
lead bank in the case of SME Debt Restructuring Mechanism and the individual
banks in other cases, may consider the proposals for restructuring in such cases,
after ensuring that all the formalities in seeking the approval from BIFR are
completed before implementing the package.
(c) after commencement of commercial production / operation and the asset has
been classified as 'sub-standard' or 'doubtful'.
11.2.2 The non-performing assets, upon restructuring, would continue to have the
same asset classification as prior to restructuring and slip into further lower asset
classification categories as per extant asset classification norms with reference to
the pre-restructuring repayment schedule.
Banks will hold provision against the restructured advances as per the existing
provisioning norms.
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.
(ii) In the case of working capital facilities, the diminution in the fair value of the
cash credit / overdraft component may be computed as indicated in para (i) above,
reckoning the higher of the outstanding amount or the limit sanctioned as the
principal amount and taking the tenor of the advance as one year. 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.
(iii) In the event any security is taken in lieu of the diminution in the fair value of
the advance, it should be valued at Re.1/- till maturity of the security. This will
ensure that the effect of charging off the economic sacrifice to the Profit & Loss
account is not negated.
(iv) The diminution in the fair value may be re-computed on each balance sheet
date till satisfactory completion of all repayment obligations and full repayment of
the outstanding in the account, so as to capture the changes in the fair value on
account of changes in BPLR, term premium and the credit category of the
borrower. Consequently, banks may provide for the shortfall in provision or reverse
the amount of excess provision held in the distinct account.
11.4.3 The total provisions required against an account ( normal provisions plus
provisions in lieu of diminution in the fair value of the advance) are capped at 100%
of the outstanding debt amount.
A part of the outstanding principal amount can be converted into debt or equity
instruments as part of restructuring. The debt / equity instruments so created will
be classified in the same asset classification category in which the restructured
advance has been classified. Further movement in the asset classification of these
instruments would also be determined based on the subsequent asset classification
of the restructured advance.
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. 1.
Depreciation on these instruments should not be offset against the appreciation in
any other securities held under the AFS category.
13. Prudential Norms for Conversion of Unpaid Interest into 'Funded Interest
Term Loan' (FITL), Debt or Equity Instruments
The FITL / debt or equity instrument created by conversion of unpaid interest will
be classified in the same asset classification category in which the restructured
advance has been classified. Further movement in the asset classification of FITL
/ debt or equity instruments would also be determined based on the subsequent
asset classification of the restructured advance.
13.2.3 In the case of conversion of unrealised interest income into equity, which is
quoted, interest income can be recognized after the account is upgraded to
standard category at market value of equity, on the date of such up gradation, not
exceeding the amount of interest converted into equity.
(ii) Retention of the asset classification of the restructured account in the pre-
restructuring asset classification category
As stated in para 11.1.2, during the pendency of the application for restructuring
of the advance with the bank, the usual asset classification norms would continue
to apply. 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:
(i) Within 120 days from the date of approval under the CDR Mechanism.
(ii) Within 90 days from the date of receipt of application by the bank in cases
other than those restructured under the CDR Mechanism.
(ii) In modification to para 11.2.2, during the specified period, the asset
classification of the sub-standard / doubtful accounts will not deteriorate upon
restructuring, if satisfactory performance is demonstrated during the specified
period.
However, these benefits will be available subject to compliance with the following
conditions:
i) The dues to the bank are 'fully secured' as defined in Annex 5. The condition of
being fully secured by tangible security will not be applicable in the following cases:
(b) Infrastructure projects, provided the cash flows generated from these
projects are adequate for repayment of the advance, the financing bank(s) have in
place an appropriate mechanism to escrow the cash flows, and also have a clear and
legal first claim on these cash flows.
iii) The repayment period of the restructured advance including the moratorium, if
any, does not exceed 15 years in the case of infrastructure advances and 10 years
in the case of other advances. 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. Lending to individuals meant for
acquiring residential property which are fully secured by mortgages on residential
property that is or will be occupied by the borrower or that is rented are risk
weighted as under the new capital adequacy framework, provided the LTV is not
more than 75% , based on board approved valuation policy. However, the
restructured housing loans should be risk weighted with an additional risk weight
of 25 percentage points to the risk weight prescribed already.
iv) Promoters' sacrifice and additional funds brought by them should be a minimum
of 15% of banks' sacrifice. The term 'bank's sacrifice' means the amount of
"erosion in the fair value of the advance", to be computed as per the methodology
enumerated in para 11.4.2 (i) above. Further, the additional funds required to be
brought in by the promoter should be brought up front and not be phased over a
period of time.
v) Personal guarantee is offered by the promoter except when the unit is affected
by external factors pertaining to the economy and industry.
15. Miscellaneous
15.1 The banks should decide on the issue regarding convertibility (into equity)
option as a part of restructuring exercise whereby the banks / financial
institutions shall have the right to convert a portion of the restructured amount
into equity, keeping in view the statutory requirement under Section 19 of the
Banking Regulation Act, 1949, (in the case of banks) and relevant SEBI regulations.
15.5 Since the spillover effects of the global downturn had also started affecting
the Indian economy particularly from September 2008 onwards creating stress for
the otherwise viable units / activities, certain modifications were made in the
guidelines on restructuring as a onetime measure and for a limited period of time
i.e. up to June 30, 2009. These relaxations have ceased to operate from July 1,
2009; however the same have been consolidated in Annex 8.
16. Disclosures
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-7. The information would be required for advances restructured
under CDR Mechanism, SME Debt Restructuring Mechanism and other categories
separately. Banks must disclose the total amount outstanding in all the accounts /
facilities of borrowers whose accounts have been restructured along with the
restructured part or facility. This means even if only one of the facilities /
accounts of a borrower has been restructured, the bank should also disclose the
entire outstanding amount pertaining to all the facilities / accounts of that
particular borrower.
17. Illustrations
Part C
Agricultural Debt Waiver and Debt Relief Scheme, 2008 - Prudential Norms
on
Income Recognition, Asset Classification, Provisioning, and Capital Adequacy
20. Prudential Norms for the Borrowal Accounts Covered under the
Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS)
20.1.1 As regards the small and marginal farmers eligible for debt waiver, the
amount eligible for waiver, as defined in the Para 4 of the enclosure to the
aforesaid circular, pending receipt from the Government of India, may be
transferred by the banks to a separate account named "Amount receivable from
Government of India under Agricultural Debt Waiver Scheme 2008". The balance
in this account should be reflected in Schedule 9 (Advances) of the Balance sheet.
20.1.2 The balance in this account may be treated by the banks as a "performing"
asset, provided adequate provision is made for the loss in Present Value (PV) terms,
computed under the assumption that such payments would be received from
Government of India in the following installments :
However, the provision required under the current norms for standard assets,
need not be provided for in respect of the balance in this account.
20.1.3 The discount rate for arriving at the loss in PV terms as at para 20.1.2
above should be taken as 9.56 per cent, being the yield to maturity on 364-day
Government of India Treasury Bill, prevailing as on the date of the circular
DBOD.No.BP.BC.26/21.04.048/2008-09 dated July 30, 2008.
20.1.4 The prudential provisions held in respect of the NPA accounts for which the
debt waiver has been granted may be reckoned for meeting the provisions required
on PV basis.
20.1.5 In case, however, the amount of prudential provision held is more than the
amount of provision required on PV basis, such excess provision may be reversed in
a phased manner. This phased reversal may be effected in the proportion of 32%,
19%, 39%, and 10% during the years ended March 2009, 2010, 2011 and 2012,
respectively, only after the installments due from the Government, for the relative
years, have been received.
20.1.6 On receipt of the final instalment from the Government, the provision made
for loss in PV terms may be transferred to the General Reserves, below the line.
20.1.7 In case the claim of a farmer is specifically rejected at any stage, the asset
classification of the account should 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 transfer of the loan balance to the aforesaid account)
and suitable provision should be made. 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.
20.2.1 Under the scheme, in the case of 'other' farmers, the farmer will be given
a rebate of 25% of the "eligible amount", by the Government by credit to his
account, provided the farmer pays the balance of 75% of the 'eligible amount'. The
Scheme provides for payment of share of 75% by such farmers in three
instalments and the first two instalments shall be for an amount not less than one-
third of the farmer's share. The last dates of payment of the three instalments
will be September 30, 2008; March 31, 2009 and June 30, 2009, respectively.
Asset Classification
20.2.2 Where the farmers covered under the Debt Relief Scheme have given the
undertaking, agreeing to pay their share under the OTS, their relevant accounts
may be treated by banks as "standard" / "performing" provided :
(a) adequate provision is made by the banks for the loss in PV terms for all the
receivables due from the borrowers as well as the Government; and
(b) such farmers pay their share of the settlement within one month of the due
dates
However, no grace period is allowed for the last instalment and the entire share of
the farmer is payable by June 30, 2009 (cf Para 21.2)
Provisioning
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.
20.2.4 Provisioning on PV Basis
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 20.2.1
above, as well as from the government should be discounted to the present value.
It may be assumed in this context that the Government's contribution would be
received by June 30, 2010. 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.
20.2.5 The prudential provisions held in respect of the NPA accounts, for which
the debt relief has been granted, may be reckoned for meeting the provisions
required on PV basis as well as for the standard assets (pursuant to classification
of these loans as standard) and shortfall, if any, may be provided for. 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 20.2.2 (b) above, the accounts subject to Debt Relief
Scheme would be classified as standard / performing assets only if the farmers
pay their share of the settlement within one month of the pre-specified due dates.
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.
(a) till the entire outstanding of the borrower stands repaid - at which point, the
entire amount could be reversed to the P/L account; or
(b) when the amount of such excess provision exceeds the amount outstanding on
account of the repayments by the borrower - at which point, the amount of
provision in excess of the outstanding amount could be reversed to the P/L
account.
The provision made on PV basis represents a permanent loss to the bank on account
of delayed receipt of cash flows and hence, should not be reversed to the P/L
Account. The amount of such provision should, therefore, be carried till the
account is finally settled and after receipt of the Government's contribution under
the Scheme, the amount should be reversed to the General Reserves, below the
line.
20.3 Grant of Fresh Loans to the Borrowers covered under the ADWDRS
20.3.1 A small or marginal farmer will become eligible for fresh agricultural loans
upon the eligible amount being waived, in terms of para 7.2 of the enclosure to the
circular RPCD.No.PLFS.BC.72/05.04.02/2007-08 dated May 23, 2008. The fresh
loan may be treated as "performing asset", regardless of the asset classification
of the loan subjected to the Debt Waiver, and its subsequent asset classification
should be governed by the extant IRAC norms.
20.3.2 In case of "other farmers" eligible for fresh short-term production loans
and investment loans, as provided for in Para 7.6 and 7.7, respectively, of the
enclosure to the circular RPCD.No.PLFS.BC.72/05.04.02/2007-08 dated May 23,
2008, these fresh loans may be treated as "performing assets", regardless of the
asset classification of the loan subjected to the Debt Relief, and its subsequent
asset classification should be governed by the extant IRAC norms.
The Government of India has subsequently decided to pay interest on the 2nd, 3rd,
and 4th instalments, payable by July 2009, July 2010, and July 2011 respectively,
at the prevailing Yield to Maturity Rate on 364-day Government of India Treasury
Bills. The interest will be paid on these instalments from the date of the
reimbursement of the first instalment (i.e. November 2008) till the date of the
actual reimbursement of each instalment.
21.2 Change in instalment schedule of “other farmers” under the Debt Relief
Scheme
In view of the recent drought in some States and the severe floods in some other
parts of the country, the Government of India, as announced in the Union Budget
2010-11, has now decided to extend the last date of payment of 75% of overdue
portion by the 'other farmer' under Debt Relief Scheme (under ADWDR) up to
June 30, 2010. The eligible "other farmers" may be allowed to repay this amount in
one or more instalments up to June 30, 2010. The banks will not charge any
interest on the eligible amount for the period from February 29, 2008 to June 30,
2009. However, they may charge normal rate of interest on the eligible amount
from July 01, 2009 up to the date of settlement. Further, no interest shall be paid
by the Government of India to the lending institutions for this extension under the
Scheme while reimbursing the 25% amount to the lending institutions as per the
delayed reimbursement schedule
The Government of India has also advised that the banks / lending institutions are
allowed to receive even less than 75% of the eligible amount under OTS provided
the banks / lending institutions bear the difference themselves and do not claim
the same either from the Government or from the farmer. The Government will
pay only 25% of the actual eligible amount under debt relief.
21.3 In case, however, the payments are delayed by the farmers beyond June 30,
2010, 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.
21.4 Please refer to the paragraph 20.1.1 which provides that in case of small and
marginal farmers eligible for debt waiver, the amount eligible for waiver, pending
receipt from the Government of India may be transferred by the banks to a
separate account named "Amount receivable from Government of India under
Agricultural Debt Waiver Scheme 2008", and the balance in this account should be
reflected in Schedule 9 (Advances) of the Balance Sheet. It is now clarified that
in case of 'other farmers' eligible for debt relief, after the 'other farmer' has
paid his entire share of 75%, banks may open an account for Debt Relief Scheme,
similar to the one opened for the receivables from GOI under the Debt Waiver
Scheme, and bearing the nomenclature "Amount receivable from Government of
India under Agricultural Debt Relief Scheme 2008". This amount may also be
reflected in Schedule 9 (Advances) of the Balance Sheet.
RBI/2010-11/41
Dear Sir,
2. It may be noted that all relevant instructions on the above subject contained in the
circulars listed in the Annex have been consolidated. In addition, disclosure
requirements contained in "Master Circular – Prudential Guidelines on Capital
Adequacy and Market Discipline - Implementation of the New Capital Adequacy
Framework (NCAF)" will be applicable.
Yours faithfully,
(B. Mahapatra) Chief General Manager-In-Charge
Purpose
To provide a detailed guidance to banks in the matter of disclosures in the ‘Notes to
Accounts’ to the Financial Statements.
Classification
A statutory guideline issued by the Reserve Bank of India under Section 35A of the
Banking Regulation Act 1949.
Previous Guidelines superseded
Master Circular on ‘Disclosure in Financial Statements – Notes to Accounts’ issued vide
DBOD.BP.BC No.22/21.04.018/2009-10 dated July 1, 2009
Scope of application
Structure
1 Introduction
2.1 Presentation
2.2 Minimum Disclosures
2.3 Summary of Significant Accounting Policies
2.4 Disclosure Requirements
3.1 Capital
3.2 Investments
3.2.1 Repo Transactions
3.2.2 Non-SLR Investment Portfolio
3.3 Derivatives
3.3.1 Forward Rate Agreement/ Interest Rate Swap
3.3.2 Exchange Traded Interest Rate Derivatives
3.3.3 Disclosures on risk exposure in derivatives
3.4 Asset Quality
3.4.1 Non-Performing Asset
3.4.2 Particulars of Accounts Restructured
3.4.3 Details of financial assets sold to Securitisation/ Reconstruction Company for
Asset Reconstruction
3.4.4 Details of non performing asset purchased/sold
1. Introduction
The users of the financial statements need information about the financial position and
performance of the bank in making economic decisions. They are interested in its
liquidity and solvency and the risks related to the assets and liabilities recognised on its
balance sheet and to it’s off balance sheet items. In the interest of full and complete
disclosure, some very useful information is better provided, or can only be provided, by
notes to the financial statements. The use of notes and supplementary information
provides the means to explain and document certain items, which are either presented
in the financial statements or otherwise affect the financial position and performance of
the reporting enterprise. Recently, a lot of attention has been paid to the issue of market
discipline in the banking sector. Market discipline, however, works only if market
participants have access to timely and reliable information, which enables them to
assess banks’ activities and the risks inherent in these activities. Enabling market
discipline may have several benefits. Market discipline has been given due importance
under Basel II by recognizing it as one of its three Pillars.
2.1 Presentation
‘Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown
under Schedule 17 and Schedule 18 respectively, to maintain uniformity.
3.1 Capital
i) CRAR (%)
ii) CRAR - Tier I Capital (%)
iii) CRAR - Tier II Capital (%)
3.2 Investments
(Amount in Rs. crore)
securities
ii. Corporate debt
securities
(vi) Others
(vii) Provision held XXX XXX XXX XXX
towards
depreciation
Total *
Note: (1) *Total under column 3 should tally with the total of Investments included under the
following categories in Schedule 8 to the balance sheet:
a) Shares
b) Debentures & Bonds
c) Subsidiaries/joint ventures
d) Others
(2) Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive.
ii) Non performing Non-SLR investments
(Amount in Rs. crore)
Particulars
Opening balance
Additions during the year since 1st April
Reductions during the above period
Closing balance
Total provisions held
3.3 Derivatives
Note: Nature and terms of the swaps including information on credit and market risk and the
accounting policies adopted for recording the swaps should also be disclosed.
$ Examples of concentration could be exposures to particular industries or swaps with
highly geared companies.
@ If the swaps are linked to specific assets, liabilities, or commitments, the fair value
would be the estimated amount that the bank would receive or pay to terminate the swap
agreements as on the balance sheet date. For a trading swap the fair value would be its
mark to market value.
3.3.2 Exchange Traded Interest Rate Derivatives
(Amount in Rs. crore)
S.No. Particulars
(i) Notional principal amount of exchange traded interest rate derivatives
undertaken during the year (instrument-wise)
a) b) c)
Qualitative Disclosure
Banks shall discuss their risk management policies pertaining to derivatives with
particular reference to the extent to which derivatives are used, the associated
risks and business purposes served. The discussion shall also include:
a) the structure and organization for management of risk in derivatives
trading,
b) the scope and nature of risk measurement, risk reporting and risk
monitoring systems,
c) policies for hedging and/ or mitigating risk and strategies and processes for
monitoring the continuing effectiveness of hedges / mitigants, and
d) accounting policy for recording hedge and non-hedge transactions;
recognition of income, premiums and discounts; valuation of outstanding
contracts; provisioning, collateral and credit risk mitigation.
Quantitative Disclosures
(Amount in Rs. crore)
Sl.No Particular Currency Derivatives Interest rate derivatives
a) on hedging derivatives
b) on trading derivatives
(v) Maximum and Minimum of 100*PV01 observed during the year
a) on hedging
b) on trading
Amount outstanding
Sacrifice (diminution in the fair value)
Sub-standard advances restructured No. of Borrowers
Amount outstanding
Sacrifice (diminution in the fair value)
Amount outstanding
Sacrifice (diminution in the fair value)
Note: Banks must disclose the total amount outstanding in all the accounts / facilities of
borrowers whose accounts have been restructured along with the restructured part or facility.
This means even if only one of the facilities / accounts of a borrower has been restructured, the
bank should also disclose the entire outstanding amount pertaining to all the facilities / accounts
of that particular borrower.
Note: Provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Provisions against Standard Assets', under 'Other Liabilities and
Provisions - Others' in Schedule No. 5 of the balance sheet.
3.7 Exposures
a) Direct exposure
(i) Residential Mortgages –
Lending fully secured by mortgages on residential property that is or will be
occupied by the borrower or that is rented; (Individual housing loans eligible for
inclusion in priority sector advances may be shown separately)
(ii) Commercial Real Estate –
Lending secured by mortgages on commercial real estates (office buildings, retail
space, multi-purpose commercial premises, multi-family residential buildings, multi-
tenanted commercial premises, industrial or warehouse space, hotels, land
acquisition, development and construction, etc.). Exposure would also include non-
fund based (NFB) limits;
(iii) Investments in Mortgage Backed Securities (MBS) and other securitised
exposures –
a. Residential,
b. Commercial Real Estate.
b) Indirect Exposure
Fund based and non-fund based exposures on National Housing Bank (NHB) and
Housing Finance Companies (HFCs).
Insignificant
Low
Moderate
High
Very High
Restricted
Off-credit
Total
*Till such time, as banks move over to internal rating systems, banks may use the seven
category classification followed by Export Credit Guarantee Corporation of India Ltd.
(ECGC) for the purpose of classification and making provisions for country risk exposures.
ECGC shall provide to banks, on request, quarterly updates of their country classifications
and shall also inform all banks in case of any sudden major changes in country classification
in the interim period.
3.7.4 Details of Single Borrower Limit (SGL)/ Group Borrower Limit (GBL)
exceeded by the bank.
The bank should make appropriate disclosure in the ‘Notes to Account’ to the annual
financial statements in respect of the exposures where the bank had exceeded the
prudential exposure limits during the year. The sanctioned limit or entire outstanding,
whichever is high, shall be reckoned for arriving at exposure limit and for disclosure
purpose.
4.1 Accounting Standard 5 – Net Profit or Loss for the period, prior period items
and changes in accounting policies. Since the format of the profit and loss account of
banks prescribed in Form B under Third Schedule to the Banking Regulation Act 1949
does not specifically provide for disclosure of the impact of prior period items on the
current year’s profit and loss, such disclosures, wherever warranted, may be made in
the ‘Notes to Accounts’ to the balance sheet of banks.
4.2 Accounting Standard 9 – Revenue Recognition
This Standard requires that in addition to the disclosures required by Accounting
Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), an enterprise should also
disclose the circumstances in which revenue recognition has been postponed pending
the resolution of significant uncertainties.
Operating profit
Income taxes
Net profit
Other Information:
Segment assets
Unallocated assets
Total assets
Segment liabilities
Unallocated liabilities
Total liabilities
Revenue
Assets
Advances #
Investments#
Non-funded commitments#
Interest paid
Interest received
Rendering of services *
Receiving of services *
Management contracts*
Note: Where there is only one entity in any category of related party, banks need not
disclose any details pertaining to that related party other than the relationship with that
related party [c.f. Para 8.3.1 of the Guidelines]
* Contract services etc. and not services like remittance facilities, locker facilities etc.
@ Whole time directors of the Board and CEOs of the branches of foreign banks in
India.
# The outstanding at the year-end and the maximum during the year are to be
disclosed.
Illustrative disclosure of names of the related parties and their relationship with the bank
1. Parent A Ltd
2. Subsidiaries B Ltd and C Ltd
4. Associates P Ltd, Q Ltd and R Ltd
5. Jointly controlled entity L Ltd
6. Key Management Personnel Mr.M and Mr.N
7. Relatives of Key Management Personnel Mr.D and Mr.E
4.6 Accounting Standard 21 – Consolidated Financial Statements (CFS)
As regards disclosures in the ‘Notes to Accounts’ to the Consolidated Financial
Statements, banks may be guided by general clarifications issued by Institute of
Chartered Accountants of India from time to time.
A parent company, presenting the CFS, should consolidate the financial statements of
all subsidiaries - domestic as well as foreign, except those specifically permitted to be
excluded under the AS-21. The reasons for not consolidating a subsidiary should be
disclosed in the CFS. The responsibility of determining whether a particular entity
should be included or not for consolidation would be that of the Management of the
parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought
to have been consolidated, has been omitted, they should incorporate their comments
in this regard in the "Auditors Report".
4.7 Accounting Standard 22 – Accounting for Taxes on Income
This Standard is applied in accounting for taxes on income. This includes the
determination of the amount of the expense or saving related to taxes on income in
respect of an accounting period and the disclosure of such an amount in the financial
statements. Adoption of AS 22 may give rise to creation of either a deferred tax asset
(DTA) or a deferred tax liability (DTL) in the books of accounts of banks and creation of
DTA or DTL would give rise to certain issues which have a bearing on the computation
of capital adequacy ratio and banks’ ability to declare dividends. In this regard it is
clarified as under:
• DTL created by debit to opening balance of Revenue Reserves on the first day
of application of the Accounting Standards 22 or to Profit and Loss account for
the current year should be included under item (vi) ‘others (including provisions)’
of Schedule 5 - ‘Other Liabilities and Provisions’ in the balance sheet. The
balance in DTL account will not be eligible for inclusion in
Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.
• DTA created by credit to opening balance of Revenue Reserves on the first day
of application of Accounting Standards 22 or to Profit and Loss account for the
current year should be included under item (vi) ‘others’ of Schedule 11 ‘Other
Assets’ in the balance sheet.
• The DTA computed as under should be deducted from Tier I capital:
i) DTA associated with accumulated losses; and
ii) The DTA (excluding DTA associated with accumulated losses), net of
DTL. Where DTL is in excess of the DTA (excluding DTA associated with
accumulated losses), the excess shall neither be adjusted against item (i)
nor added to Tier I capital.
Note: The purpose of draw down made during the accounting year may be mentioned
Suitable disclosures are to be made regarding any draw down of reserves in the ‘Notes
to Accounts’ to the Balance Sheet.
5.4 Disclosure of complaints
Banks are also advised to disclose the following brief details along with their financial
results:
A. Customer Complaints
Banks should disclose in the ‘Notes to Accounts’, from the year ending March 31, 2010,
the details of fees/remuneration received in respect of the bancassurance business
undertaken by them.
**Exposures should be computed based on credit and investment exposure as prescribed in our
Master Circular on Exposure Norms.
5.8.4 Concentration of NPAs
(Amount in Rs. crore)
Total Exposure to top four NPA accounts
3 Services
4 Personal Loans
5.10 Movement of NPAs
(Amount in Rs. crore)
Particulars
st
Gross NPAs* as on 1 April of particular year (Opening Balance)
Additions (Fresh NPAs) during the year
Sub-total (A)
Less:-
(i) Upgradations
(ii) Recoveries (excluding recoveries made from upgraded accounts)
(iii) Write-offs
Sub-total (B)
st
Gross NPAs as on 31 March of following year (closing balance) (A-B)
Particulars
Total Assets
Total NPAs
Total Revenue
06
28 DBOD.BP.BC.86/ 21.04.018/2005- May 29, 3 Disclosure in Balance Sheets 4.12.1
06 2006 – Provisions and
Contingencies
29 DBOD.NO.BP. BC.89/21.04.048/ Jun 22, 2.(iv) Prudential norms on creation 4.12.2
2005-06 2006 and utilisation of floating
provisions
30 DBOD.BP.BC.31/ 21.04.018/ 2006-07 Sep 20, 3.(iii) Section 17 (2) of Banking 4.12.3
2006 Regulation Act, 1949 –
Appropriation from Reserve
Fund
31DBOD.No.Dir.BC.47/13.07.05/2006- Dec 15, 2.1 Banks’ exposure to Capital 3.7.2
2007 2006 Markets – Rationalization of
Norms
32 DBOD.No.Leg BC.60/09.07.005/ Feb 22, 3. Analysis and Disclosure of 4.12.4
2006-07 2007 complaints - Disclosure of
complaints / unimplemented
awards of Banking
Ombudsmen along with
Financial Results
33 DBOD.No.BP.BC. 81 / 21.04.018/ Apr18, 4 Guidelines - Accounting 4.4
2006-07 2007 Standard 17(Segment
Reporting) – Enhancement of
disclosures
34 DBOD.No.BP.BC. Apr 10 "Implementation of
90/20.06.001/ 2006- 27, the New Capital
07 2007 Adequacy
Framework"
35 DBOD No. BP.BC. 65/21.04.009/ Mar 4, 2.(iv) Prudential Norms for Issuance 4.12.5
2007-08 2008 of Letters of Comfort by Banks
regarding their Subsidiaries
36DBOD.No.BP.BC.37/ Aug 27, Annex Prudential Guidelines on 3.4.2
21.04.132/2008-09 2008 3 Restructuring of Advances by
Banks
37DBOD.No.BP.BC.. Apr 17, Annex Prudential guidelines on 3.4.2
124/21.04.132/2008-09 2009 restructuring of advances