Prudential Norms Overview

Questions and Answers

What is the time frame allowed for the deferment of DCCO for infrastructure projects due to court cases?

Four years (correct)

One year

Two years

Three years

Under what condition will the asset classification of a project loan remain as Standard after DCCO deferment?

If all terms of the loan remain unchanged (correct)

If the project is non-infrastructure related

If the repayment schedule is changed significantly

If the revised DCCO exceeds the original by more than two years

What is the maximum extension period allowed for non-infrastructure projects facing delays beyond the control of promoters?

Four years

One year

Two years

Three years (correct)

Which type of projects can extend their DCCO due to legal reasons without it being treated as loan restructuring?

Infrastructure projects with court cases Signup and view all the answers

What is the definition of 'Project Loan' as stated in the guidelines?

A term loan for setup of an economic venture Signup and view all the answers

For what duration may a deferment of DCCO be accepted without restructuring for non-infrastructure projects?

Two years Signup and view all the answers

What happens to the asset classification if the revised DCCO for an infrastructure project exceeds the original by more than four years?

It may be classified as Substandard Signup and view all the answers

What is required at the time of financial closure regarding the DCCO?

It should be documented and clear Signup and view all the answers

What is the maximum period after which asset classification may be made if the importer has cleared dues but funds are not remitted?

One year Signup and view all the answers

Under what condition will a credit card account be classified as a non-performing asset?

If the minimum amount due is not paid within 90 days Signup and view all the answers

What should banks do if loss assets are permitted to remain on the books?

Provide 100% of the outstanding amount Signup and view all the answers

What is the responsibility of bank management regarding asset provisions?

To make adequate provisions for any diminution in asset value Signup and view all the answers

When will a bank report a credit card account as 'past due'?

If it is past due for more than three days Signup and view all the answers

How should doubtful assets be provisioned?

100% of the amount that is not covered by realisable security value Signup and view all the answers

What is the consequence if the minimum amount due on a credit card is not paid within the stipulated time?

Late payment charges are levied Signup and view all the answers

What is required from banks regarding substandard assets?

To make provisions for them Signup and view all the answers

What is the provisioning requirement for an asset that has remained in the 'doubtful' category for more than three years?

100% Signup and view all the answers

What is the total provisioning requirement for unsecured exposures that are identified as substandard?

25% Signup and view all the answers

Which type of loan accounts are subject to a provisioning requirement of 20% instead of the standard 25% when classified as substandard?

Infrastructure loan accounts Signup and view all the answers

What is the percentage of general provision required on total outstanding for substandard assets?

15% Signup and view all the answers

What is the meaning of 'unsecured exposure' as defined in the context?

An exposure where the security value is not more than 10% of the outstanding exposure Signup and view all the answers

What is the required frequency of stock audits for NPAs with balances of ₹5 crore and above?

Annually Signup and view all the answers

When assets are categorized as 'doubtful', which of the following is NOT a designated provisioning percentage?

15% Signup and view all the answers

What additional provision is required for unsecured exposures classified as substandard after the general provision?

10% Signup and view all the answers

What happens to the interest accrued on an advance that has become NPA if it remains unrealized?

It should be reversed if not realized. Signup and view all the answers

In the case of NPAs, which type of income can cease to accrue during the current period?

Fees, commission, and similar income that is uncollected. Signup and view all the answers

How should a bank approach the appropriation of recoveries in NPAs in the absence of a clear agreement?

Adopt an accounting principle and be consistent. Signup and view all the answers

What should banks do upon an account turning NPA regarding previously charged interest?

Reverse the interest and stop further application. Signup and view all the answers

What characterizes an asset classified as substandard?

It has been NPA for less than or equal to 12 months. Signup and view all the answers

When should a bank reverse the finance charge component of finance income on a leased asset?

Once the asset becomes non-performing. Signup and view all the answers

What action should a bank take regarding recognized interest accrued on an NPA?

Debit the Profit and Loss account and reverse it. Signup and view all the answers

How should interest recorded in a Memorandum account be treated for computing Gross Advances?

Excluded from Gross Advances. Signup and view all the answers

What is the primary criterion for a loan to be classified as a non-performing asset (NPA)?

Interest or principal remains overdue for more than 90 days. Signup and view all the answers

Which of the following statements is true regarding the provisioning for advances?

Provisioning should be based on the classification of assets over time. Signup and view all the answers

What is the maximum period for which an installment of principal or interest can be overdue for a loan concerning short-duration crops before it is classified as an NPA?

Two crop seasons. Signup and view all the answers

How does the Reserve Bank of India recommend banks to handle loan repayments?

By setting realistic repayment schedules based on cash flows. Signup and view all the answers

In which scenario would a loan related to bills purchased and discounted be classified as an NPA?

When the bill remains overdue for more than 90 days. Signup and view all the answers

Which of the following is NOT a condition for an asset being classified as non-performing?

The annual financial report being unfiled. Signup and view all the answers

What should the provisioning for non-performing assets be based on?

The classification period and security realizable value. Signup and view all the answers

What does the Reserve Bank of India prioritize in the policy of income recognition?

Objective measures based on recovery records. Signup and view all the answers

What is the total maximum extension period available for project loans for non-infrastructure sector due to delays beyond the control of promoters?

Two years Signup and view all the answers

For commercial real estate exposures, what condition must be met for the relaxation period to be granted?

The repayment schedule is extended by a shorter period than the DCCO extension. Signup and view all the answers

What is the consequence for banks if the application for restructuring is not received before the expiration period?

The account is classified as non-performing. Signup and view all the answers

How long should banks refrain from booking income on an accrual basis for infrastructure projects with moratorium?

Two years Signup and view all the answers

What must be complied with in addition to the repayment schedule for commercial real estate exposures seeking extension?

Provisions of the Real Estate (Regulation and Development) Act, 2016 Signup and view all the answers

What happens to an account where regular or ad hoc credit limits have not been reviewed within 180 days from the due date?

It will be treated as a non-performing asset (NPA). Signup and view all the answers

Under what condition can a loan account classified as NPA be upgraded to standard asset?

Payment of all arrears of interest and principal. Signup and view all the answers

What is the maximum total extension period for DCCO for infrastructure projects due to court cases?

Four years Signup and view all the answers

Under what condition can banks retain the asset classification as Standard when the DCCO is revised?

All loan terms must remain unchanged Signup and view all the answers

How should asset classification be applied according to the guidelines?

Borrower-wise to reflect overall exposure. Signup and view all the answers

What should be done with an account indicating inherent weaknesses based on available data?

Deem it as a non-performing asset (NPA). Signup and view all the answers

What is the classification period allowed for deferment of DCCO for non-infrastructure projects?

Two years Signup and view all the answers

What is the primary factor that allows a project loan to qualify for a DCCO deferment?

Delays for reasons beyond the control of promoters Signup and view all the answers

What is the treatment for bills discounted under a letter of credit if another facility to the borrower is classified as NPA?

They may not be classified as NPA. Signup and view all the answers

What condition allows for an account to be regularized before the balance sheet date?

A single credit transaction recorded. Signup and view all the answers

What is the allowed deferment period for infrastructure projects delayed for reasons other than court cases?

Three years Signup and view all the answers

What must be clearly documented at the time of financial closure regarding DCCO?

The DCCO of the project Signup and view all the answers

What is required from borrowers to upgrade multiple loan accounts classified as NPAs?

Repayment of entire arrears of interest and principal for all loans. Signup and view all the answers

Which of the following is NOT a reason for treating loans as NPAs?

Regular repayments made. Signup and view all the answers

What happens to the asset classification if the revised DCCO for a non-infrastructure project exceeds the original DCCO by more than two years?

It will be classified as Substandard Signup and view all the answers

Which of the following is a condition for deferment of DCCO in infrastructure projects involving legal issues?

The reason for delay must involve court cases Signup and view all the answers

What defines a loss asset in banking?

An asset identified as uncollectible but not wholly written off. Signup and view all the answers

Which factor should not influence the classification of an advance as NPA?

The availability of security or net worth of the borrower. Signup and view all the answers

When can a working capital borrowal account be classified as NPA?

With irregular drawings for 90 days continuously. Signup and view all the answers

What is required for a bank to appropriately classify an asset category?

Automation of Income Recognition and Classifications. Signup and view all the answers

Which situation is considered a temporary deficiency in asset classification?

Non-renewal of loan limits. Signup and view all the answers

What is the maximum age of stock statements that banks should rely on for determining drawing power?

Three months. Signup and view all the answers

How should banks treat an account with documented deficiencies that are temporary in nature?

Do not classify as NPA based solely on temporary deficiencies. Signup and view all the answers

What is necessary for banks to comply with when classifying assets?

Establishing appropriate internal systems and infrastructure. Signup and view all the answers

When should agricultural advances for short duration crops be classified as NPA?

When the installment of principal remains overdue for two crop seasons. Signup and view all the answers

What defines a long duration crop in the context of agricultural advances?

Crops with a crop season longer than one year. Signup and view all the answers

Under what condition should loans to individual farmers, including SHGs or JLGs, be classified in relation to agricultural advances?

They must meet the same delinquency norm as non-agricultural advances. Signup and view all the answers

What is the status of interest on a housing loan where interest is payable after recovery of principal?

It is not classified as overdue until there is a default in repayment. Signup and view all the answers

What criteria are used to identify NPAs for agricultural loans besides crop loans?

They follow the same 90 days delinquency norm as non-agricultural advances. Signup and view all the answers

Which activity is NOT excluded from the definition of Farm Credit activities eligible for crop season linked asset classification norms?

Loans to farmers for purchasing livestock. Signup and view all the answers

What must banks do regarding loans to distressed farmers indebted to non-institutional lenders?

Provide loans under the same conditions as regular agricultural advances. Signup and view all the answers

What is the repayment timeline for long duration crop loans to be classified as NPA?

They are classified if overdue for one crop season. Signup and view all the answers

Study Notes

Prudential Norms Overview

Reserve Bank of India (RBI) has introduced prudential norms for income recognition, asset classification, and provisioning for bank advances.
Aims to enhance consistency and transparency in banks' published accounts, following international practices and recommendations by the Committee on Financial System.

Income Recognition

Policy relies on objective criteria, focusing on actual recovery records rather than subjective judgments.
Banks must establish realistic repayment schedules based on borrowers' cash flows to aid prompt repayment and reduce non-performing assets.

Non-Performing Assets (NPAs)

Defined as an asset that no longer generates income, such as loans or advances where:
- Interest or principal is overdue by over 90 days for term loans.
- Overdraft/Cash Credit accounts deemed 'out of order.'
- Bills purchased are overdue for more than 90 days.
- Agricultural loans are overdue for two crop seasons (short-duration crops) or one crop season (long-duration crops).
- Liquidity facilities outstanding for over 90 days concerning securitisation transactions.

Income Reversal on NPAs

Upon an advance classifying as NPA, all accrued interest credited in past periods must be reversed if not realized.
Interest accumulation halts for NPAs; however, previously accrued interest may be recorded in a Memorandum account.

Asset Classification

NPAs categorized into Substandard, Doubtful, and Loss Assets:
- Substandard: NPAs for 12 months or less.
- Doubtful: Assets in substandard for 12 months or more.

Projects Under Implementation

Date of Commencement of Commercial Operations (DCCO) must be clearly documented at loan sanction.
Deferment of DCCO for genuine delays allows assets to retain Standard classification if revised DCCO is within stipulated time frames:
- Infrastructure projects: Two years from the original DCCO.
- Non-infrastructure projects: One year from the original DCCO.
- Additional extensions available for projects delayed due to court cases or reasons outside management's control.

Credit Card Accounts

Credit card accounts become NPAs if the minimum amount due is unpaid for over 90 days.
Banks can report 'past due' status only after the account is overdue for more than three days.

Provisioning Norms

Primary responsibility for provisioning lies with bank managements and statutory auditors.
Different provisioning requirements based on asset classification:
- Loss Assets: 100% provision required; should be written off.
- Doubtful Assets: Provision based on realisable value, ranging from 25% to 100% depending on duration in the category.
- Substandard Assets: 15% general provision on total outstanding without ECGC guarantee consideration, with an additional 10% on unsecured exposures.

Other Important Notes

Unsecured exposure is defined where the security's realizable value is 10% or less of the outstanding exposure.
Mandatory external agency stock audits annually for NPAs above ₹5 crore to ensure accurate security valuation.

Loss Assets

Loss assets are identified by banks or auditors where the amount hasn't been fully written off.
Such assets are deemed uncollectible and lack sufficient value to remain as bankable assets, though some recovery value may exist.

Guidelines for Asset Classification

Classification should reflect the degree of identified credit weaknesses.
Banks must develop proper internal systems for timely identification of Non-Performing Assets (NPAs).
Infrastructure for automation of Income Recognition, Asset Classification, and Provisioning is required.
The borrower's security or net worth is irrelevant in classifying advances as NPAs.

Accounts with Temporary Deficiencies

Classification as NPA depends on actual recovery records rather than transient deficiencies.
Temporary issues include non-compliance with current stock statements or delays in limit renewals.
Drawings in working capital must be based on current assets; stock statements shouldn't be older than three months.
Accounts with irregular drawings for 90 days, even if operationally active, will be classified as NPAs.

Upgradation of Loan Accounts from NPAs

NPAs can be upgraded to standard assets once all interest and principal arrears are paid.
All credit facilities held by a borrower must be considered collectively for upgradation.

Handling of Solitary Credits Near Balance Sheet Date

Caution is advised in classifying borrowal accounts with few credits prior to balance sheet dates.
Any inherent weaknesses may warrant classifying the account as an NPA.

Borrower-wise Asset Classification

All facilities to a borrower and investments must be treated collectively, not facility-wise, in terms of NPAs.
Debits from devolvement of letters of credit should also affect the borrower's principal operating account concerning prudential norms.

Agricultural Advances

Short-duration crop loans are classified as NPAs if principal/interest is overdue for two crop seasons.
Long-duration crop loans become NPAs if overdue for one crop season.
Classification for NPAs in agricultural lending depends on crop season definitions by the State Level Bankers' Committee.

Projects Under Implementation

Date of Commencement of Commercial Operations (DCCO) must be explicitly defined at loan sanctioning.
Delays due to external factors can prompt restructuring of loans without classifying them as NPAs if certain criteria are met.

Deferment of DCCO

Deferment of DCCO does not classify loans as restructured if the revised DCCO is within specified timeframes.
Infrastructure projects delayed due to legal issues may receive extensions up to four years.
Non-infrastructure projects may have extensions up to three years, depending on circumstances beyond promoters' control.

Income Recognition and Moratoriums

For projects with moratoriums, banks should avoid income recognitions on an accrual basis beyond specified timeframes to account for risk in restructured accounts.

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Description

This quiz covers the Reserve Bank of India's prudential norms related to income recognition, asset classification, and provisioning for bank advances. Learn about the impacts on banks' accounts, the criteria for recognizing income, and the handling of non-performing assets (NPAs). Test your knowledge on these essential banking regulations.