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NORMS FOR ASSETS CLASSIFICATIONS AND PROVISION FOR LOAN ASSETS

 

The loan accounts in Banks are classified into four categories. Out of these four categories, the following three categories are considered as NPAs :-

(a) Sub-standard Assets

(b) Doubtful Assets

(c) Loss Assets

The fourth category of loan accounts, which is not included in NPA category is Standard Assets. Standard Asset is one which does not disclose any problems and which does not carry only normal risk attached to the business.

 

Sub-standard Assets

Earlier a sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset was one, which has remained NPA for a period less than or equal to 18 months.  With effect from 31 March 2005 the norms have been  further tightened and a sub-standard 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.

Doubtful Assets

Earlier a doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it had remained NPA for a period exceeding 18 months.  With effect from March 31, 2005, the norms have been further tightened, and an asset would be classified as doubtful if it remained in the sub-standard category for 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.


Loss Assets:

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.

However, only those advances are classified as loss assets where no security is available. In accounts where some security / ECGC /DICGC cover is available, these accounts are not reported under loss assets.

 

 

Concluding Note:

Thus, we can conclude that in terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 12 months and subsequently as doubtful assets.

However, it needs to be noted that the asset classification is only for the purpose of computing the amount of provision that needs to be made with respect to bank advances, and it is not for the purpose of presentation of advances in the banks balance sheet. The Third Schedule to the Banking Regulation Act, 1949, solely governs presentation of advances in the balance sheet