Reserve Bank of India Master Circular (April 2024) - PDF

भारतीय ररजर्व बैंक RESERVE BANK OF INDIA www.rbi.org.in RBI/2024-25/12 DOR.STR.REC.8/21.04.048/2024-25 April 02, 2024 All Commercial Banks (...

भारतीय ररजर्व बैंक RESERVE BANK OF INDIA www.rbi.org.in RBI/2024-25/12 DOR.STR.REC.8/21.04.048/2024-25 April 02, 2024 All Commercial Banks (excluding RRBs) Madam/Dear Sir Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances Please refer to the Master Circular DOR.STR.REC.3/21.04.048/2023-24 dated April 1, 2023 consolidating instructions / guidelines issued to banks till March 31, 2023 on matters relating to prudential norms on income recognition, asset classification and provisioning pertaining to advances. 2. Attached is the revised Master Circular, updated to reflect all instructions issued upto March 31, 2024 on the above matter, as listed in Annex 5. It may be noted that this Master Circular only consolidates all instructions on the above matter issued up to March 31, 2024 and does not contain any new instructions/guidelines. Yours faithfully (Vaibhav Chaturvedi) Chief General Manager Encl.: As above  MASTER CIRCULAR - PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING PERTAINING TO ADVANCES Table of Contents Part A....................................................................................................................................................................... 5 1. GENERAL....................................................................................................................................................... 5 2. DEFINITIONS.................................................................................................................................................. 5 2.1 Non-performing Assets.................................................................................................................................... 5 2.2 ‘Out of Order’ status................................................................................................................................................ 6 2.3 ‘Overdue’ status...................................................................................................................................................... 6 3. INCOME RECOGNITION................................................................................................................................... 7 3.1 Income Recognition Policy.............................................................................................................................. 7 3.2 Reversal of income........................................................................................................................................... 7 3.3 Appropriation of recovery in NPAs................................................................................................................. 8 3.4 Interest Application........................................................................................................................................... 8 3.5 Computation of NPA levels............................................................................................................................. 8 4. ASSET CLASSIFICATION............................................................................................................................. 8 4.1 Categories of NPAs.......................................................................................................................................... 8 4.2 Guidelines for classification of assets............................................................................................................ 9 5. PROVISIONING NORMS................................................................................................................................. 27 5.1 General................................................................................................................................................................... 27 5.2 Loss assets............................................................................................................................................................ 28 5.3 Doubtful assets...................................................................................................................................................... 28 5.4 Substandard assets.............................................................................................................................................. 28 5.5 Standard assets.................................................................................................................................................... 30 5.6 Prudential norms on creation and utilisation of floating provisions................................................................ 31 5.7 Additional Provisions at higher than prescribed rates..................................................................................... 33 5.8 Provisions on Leased Assets.............................................................................................................................. 33 5.9 Guidelines for Provisions under Special Circumstances................................................................................. 34 5.10 Provisioning Coverage Ratio............................................................................................................................. 38 6. Writing-off of NPAs......................................................................................................................................... 39 6.1 General................................................................................................................................................................... 39 6.2 Write-off at Head Office Level............................................................................................................................. 40 7. NPA Management – Requirement of Effective Mechanism and Granular Data...................................... 40 PART B1 - Framework for Resolution of Stressed Assets............................................................................ 41 8. Early identification and reporting of stress................................................................................................. 41 9. Implementation of Resolution Plan.............................................................................................................. 42 10. Implementation Conditions for RP............................................................................................................. 44 11. Delayed Implementation of Resolution Plan............................................................................................. 45 12. Prudential Norms.......................................................................................................................................... 46 13. Supervisory Review...................................................................................................................................... 46 14. Disclosures.................................................................................................................................................... 46 15. Exemptions.................................................................................................................................................... 46 Part B2: Prudential Norms Applicable to Restructuring................................................................................ 48 16. Definition of Restructuring.......................................................................................................................... 48 17. Prudential Norms.......................................................................................................................................... 49 18. Provisioning Norms...................................................................................................................................... 51 19. Additional Finance........................................................................................................................................ 52 20. Income recognition norms........................................................................................................................... 52 21. Conversion of Principal into Debt / Equity and Unpaid Interest into 'Funded Interest Term Loan' (FITL), Debt or Equity Instruments.................................................................................................................... 52 22. Change in Ownership................................................................................................................................... 55 23. Principles on classification of sale and lease back transactions as restructuring............................. 56 24. Prudential Norms relating to Refinancing of Exposures to Borrowers................................................. 56 25. Takeout Finance............................................................................................................................................ 56 26. Regulatory Exemptions................................................................................................................................ 56 27. Restructuring of frauds/willful defaulters.................................................................................................. 57 PART C – Miscellaneous.................................................................................................................................... 58 28. Wilful Defaulters and Non-Cooperative Borrowers.................................................................................. 58 29. Dissemination of Information...................................................................................................................... 59 30. Bank Loans for Financing Promoters’ Contribution................................................................................ 60 31. Credit Risk Management.............................................................................................................................. 60 32. Registration of Transactions with CERSAI................................................................................................ 62 33. Board Oversight............................................................................................................................................ 63 3 34. Specification of due date/repayment date................................................................................................. 63 35. Consumer Education................................................................................................................................... 63 PART D - ANNEXES............................................................................................................................................. 64 Annex - 1............................................................................................................................................................... 64 Details of Gross Advances, Gross NPAs, Net Advances and Net NPAs..................................................... 64 Annex – 2.............................................................................................................................................................. 66 Activities eligible for crop season linked asset classification norms......................................................... 66 Annex – 3............................................................................................................................................................... 68 Format for Computing Countercyclical Provisioning Buffer........................................................................ 68 Annex – 4.............................................................................................................................................................. 70 Independent Credit Evaluations........................................................................................................................ 70 Annex – 5.............................................................................................................................................................. 71 List of Circulars consolidated by the Master Circular on IRAC Norms....................................................... 71 4  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 non-performing 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. 2. DEFINITIONS 2.1 Non-performing Assets 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; i. interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan, 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, 5  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 the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021. vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 2.1.3 In addition, an account may also be classified as NPA in terms of certain specific provisions of this Master Circular, including inter alia Paragraphs 4.2.4, 4.2.9 and Part B2. 2.2 ‘Out of Order’ status 2.2.1 A CC/OD account shall be treated as ‘out of order’ if: i) The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or ii) The outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period1. 2.2.2 The definition of “out of order” as at paragraph 2.2.1 above shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purpose and/or which entail interest repayments as the only credits. 2.3 ‘Overdue’ status 2.3.1 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. The borrower accounts shall be flagged as overdue by the banks as part of their day-end processes for the due date, irrespective of the time of running such processes. 1 ‘Previous 90 days period’ shall be inclusive of the day for which the day-end process is being run. 6 3. INCOME RECOGNITION 3.1 Income Recognition Policy 3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also. 3.1.2 However, interest on advances against Term Deposits, National Savings Certificates (NSCs), Kisan Vikas Patras (KVPs) and life insurance policies may be taken to income account on the due date, provided adequate margin is available in the accounts. 3.1.3 Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit. 3.1.4 In cases of loans where moratorium has been granted for repayment of interest, income may be recognised on accrual basis for accounts which continue to be classified as ‘standard’. This shall be evaluated against the definition of ‘restructuring’ provided in paragraph 16 of this Master Circular. 3.1.5 Income recognition norms for loans towards projects under implementation involving deferment of DCCO shall be subject to the instructions contained in paragraph 4.2.15 of this Master Circular and that for loans against gold ornaments and jewellery for non-agricultural purposes shall be subject to the instructions contained in circular DBOD.No.BP.BC.27/21.04.048/2014-15 dated July 22, 2014 on the subject, as updated from time to time. 3.2 Reversal of income 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 If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest, if any, corresponding to the interest accrued during such moratorium period need not be reversed. 3.2.3 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. 7 3.2.4 Leased Assets - The finance charge component of finance income [as defined in ‘AS 19 Leases’)] on the leased asset which has accrued and was credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period. 3.3 Appropriation of recovery in NPAs 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. 3.4 Interest Application 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. 3.5 Computation of NPA levels 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 4.1 Categories of NPAs Banks are required to classify non-performing 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 (ii) Doubtful Assets (iii) Loss Assets 8  4.1.1 Substandard Assets With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. 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. 4.1.2 Doubtful Assets 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 substandard, 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. 4.1.3 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. 4.2 Guidelines for classification of assets 4.2.1 General Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses. 4.2.2 Appropriate internal systems for proper and timely identification of NPAs Banks should establish appropriate internal systems (including technology enabled processes) for proper and timely identification of NPAs, including putting in place the necessary infrastructure to comply with the requirements of the circular DoS.CO.PPG./SEC.03/11.01.005/2020-21 dated September 14, 2020 on Automation of Income Recognition, Asset Classification and Provisioning processes in banks (as updated). 4.2.3 Availability of security / net worth of borrower/ guarantor The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided in Paragraph 4.2.9. 9 4.2.4 Accounts with temporary deficiencies The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: a) 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. b) 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. c) 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. 4.2.5 Upgradation of loan accounts classified as NPAs The loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. In case of borrowers having more than one credit facility from a bank, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities. With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of date of commencement of commercial operations (DCCO), etc., the instructions as specified for such cases shall continue to be applicable. 10 4.2.6 Accounts regularised near about the balance sheet date The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status. 4.2.7 Asset Classification to be borrower-wise and not facility-wise 4.2.7.1 It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. 4.2.7.2 If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. 4.2.7.3 The bills discounted under LC favouring a borrower may not be classified as a Non- performing assets (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. 4.2.7.4 Derivative Contracts a) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the overdues arising from forward contracts and plain vanilla swaps and options become NPAs, all other funded facilities granted to the client shall also be classified as nonperforming asset following the principle of borrower-wise classification as per the existing asset classification norms. However, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in 11  future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant Income Recognition and Asset Classification (IRAC) norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. b) 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 sub-paragraph (a) 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. c) 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. d) 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 and held in a ‘Suspense Account- Crystallised Receivables’ in the same manner as done in the case of overdue advances. e) Further, in cases where the derivative contracts provide for more settlements in future, the MTM value will comprise of (a) crystallised receivables and (b) positive or negative MTM in respect of future receivables. If the derivative contract is not terminated on the overdue receivable remaining unpaid for 90 days, in addition to reversing the crystallised receivable from Profit and Loss Account as stipulated in sub-paragraph (d) above, the positive MTM pertaining to future receivables may also be reversed from Profit and Loss Account to another account styled as ‘Suspense Account – Positive MTM’. The subsequent positive changes in the MTM value may be credited to the ‘Suspense Account – Positive MTM’, not to P&L Account. The subsequent decline in MTM value may be adjusted against the balance in ‘Suspense Account – Positive MTM’. If the balance in this account is not sufficient, the remaining amount may be debited to the P&L Account. On payment of the overdues in cash, the balance in the ‘Suspense Account- Crystallised Receivables’ may be transferred to the ‘Profit and Loss Account’, to the extent payment is received. 12  f) If the bank has other derivative exposures on the borrower, it follows that the MTMs of other derivative exposures should also be dealt with / accounted for in the manner as described in sub-paragraph (e) above, subsequent to the crystallised/settlement amount in respect of a particular derivative transaction being treated as NPA. g) Similarly, in case a fund-based credit facility extended to a borrower is classified as NPA, the MTMs of all the derivative exposures should be treated in the manner discussed above. 4.2.8 Advances under consortium arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. 4.2.9 Accounts where there is erosion in the value of security/frauds committed by borrowers 4.2.9.1 In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate: a) Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category. b) 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. 4.2.9.2 Provisioning norms in respect of all cases of fraud a) Banks should normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts), immediately upon a fraud being detected. While computing the provisioning requirement, banks may adjust financial 13  collateral eligible under Basel III Capital Regulations - Capital Charge for Credit Risk (Standardised Approach), if any, available with them with regard to the accounts declared as fraud account; b) However, to smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected; c) Where the bank chooses to provide for the fraud over two to four quarters and this results in the full provisioning being made in more than one financial year, banks should debit 'other reserves' [i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949] by the amount remaining un-provided at the end of the financial year by credit to provisions. However, banks should proportionately reverse the debits to ‘other reserves’ and complete the provisioning by debiting profit and loss account, in the subsequent quarters of the next financial year; d) Banks shall make suitable disclosures with regard to number of frauds reported, amount involved in such frauds, quantum of provision made during the year and quantum of unamortised provision debited from ‘other reserves’ as at the end of the year. 4.2.10 Advances to Primary Agricultural Credit Societies (PACS)/Farmers’ Service Societies (FSS) ceded to Commercial Banks In respect of agricultural advances as well as advances for other purposes granted by banks to PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is in default for a period of two crop seasons in case of short duration crops and one crop season in case of long duration crops, as the case may be, after it has become due will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS. The other direct loans & advances, if any, granted by the bank to the member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if one of the credit facilities granted to the same borrower becomes NPA. 4.2.11 Advances against Term Deposits, NSCs, KVPs, etc. Advances against term deposits, NSCs eligible for surrender, KVPs and life insurance 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. 14 4.2.12 Loans with moratorium for payment of interest 4.2.12.1 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. 4.2.12.2. 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. 4.2.13 Agricultural advances 4.2.13.1 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 (SLBC) 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. 4.2.13.2 The above norms should be made applicable only to Farm Credit extended to agricultural activities as listed at Annex - 2. In respect of agricultural loans, other than those specified in the Annex - 2, identification of NPAs would be done on the same basis as non- agricultural advances, which, at present, is the 90 days delinquency norm. 4.2.13.3 Where natural calamities impair the repaying capacity of agricultural borrowers for the purposes specified in Annex - 2, banks may decide on their own as a relief measure conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs dated October 17, 2018, as updated from time to time. 15  4.2.13.4 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. 4.2.13.5 While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana / Pradhan Mantri Gram 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. 4.2.14 Government guaranteed advances 4.2.14.1 The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. 4.2.14.2 The requirement of invocation of guarantee has been delinked for deciding the asset classification and provisioning requirements in respect of State Government guaranteed exposures. 4.2.14.3 With effect from the year ending March 31, 2006, State Government guaranteed advances and investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days. 4.2.15 Projects under implementation 4.2.15.1 ‘Date of Commencement of Commercial Operations’ (DCCO) For all projects financed by the FIs/ banks, the DCCO of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan. 4.2.15.2 Deferment of DCCO (i) 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 16 classification norms would apply to the project loans before commencement of commercial operations. (ii) For this purpose, all project loans have been divided into the following two categories: a) Project Loans for infrastructure sector b) Project Loans for non-infrastructure sector ‘Project Loan’ would mean any term loan which has been extended for the purpose of setting up of an economic venture. Further, Infrastructure Sector is a sector included in the Harmonised Master List of Infrastructure sub-sectors issued by the Department of Economic Affairs, Ministry of Finance, Government of India, from time to time. (iii) Deferment of DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will not be treated as restructuring provided that: a) The revised DCCO falls within the period of two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects (including commercial real estate projects) respectively; and b) All other terms and conditions of the loan remain unchanged. As such project loans will be treated as standard assets in all respects, they will attract standard asset provision of 0.40 per cent. (iv) Banks may restructure project loans, by way of revision of DCCO beyond the time limits quoted at Paragraph 4.2.15.2(iii)(a) above and retain the ‘standard’ asset classification, if the fresh DCCO is fixed within the following limits, and the account continues to be serviced as per the restructured terms: a) Infrastructure Projects involving court cases Up to another two years (beyond the two-year period quoted at Paragraph 4.2.15.2(iii)(a) above, i.e., total extension of four years), in case the reason for extension of DCCO is arbitration proceedings or a court case. 17  b) Infrastructure Projects delayed for other reasons beyond the control of promoters Up to another one year (beyond the two-year period quoted at Paragraph 4.2.15.2(iii)(a) above, i.e., total extension of three years), in case the reason for extension of DCCO is beyond the control of promoters (other than court cases). c) Project Loans for Non-Infrastructure Sector (Other than Commercial Real Estate Exposures) Up to another one year (beyond the one-year period quoted at Paragraph 4.2.15.2(iii)(a) above, i.e., total extension of two years). d) Project Loans for Commercial Real Estate Exposures delayed for reasons beyond the control of promoter(s) Up to another one-year (beyond the one-year period quoted at Paragraph 4.2.15.2(iii)(a) above, i.e., total extension of two years), provided that the revised repayment schedule is extended only by a period equal to or shorter than the extension in DCCO and all provisions of the Real Estate (Regulation and Development) Act, 2016 are complied with. (v) It is re-iterated that a loan for a project may be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue). It is further re-iterated that the dispensation at Paragraph 4.2.15.2 (iv) is subject to the condition that the application for restructuring should be received before the expiry of period mentioned at Paragraph 4.2.15.2 (iii) (a) above and when the account is still standard as per record of recovery. The other conditions applicable would be: a) In cases where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years and one year from the original DCCO for infrastructure and non-infrastructure projects (including commercial real estate projects) respectively, considering the high risk involved in such restructured accounts. 18  b) Banks should maintain following provisions on such accounts as long as these are classified as standard assets: Particulars Provisioning Requirement If the revised DCCO is within two years/one year 0.40 per cent from the original DCCO prescribed at the time of financial closure for infrastructure and non- infrastructure projects (including commerical real estate projects) respectively If the DCCO is extended: 5.00 per cent – From the date of such restructuring till the i) Beyond two years and upto four years or three revised DCCO or 2 years from years from the original DCCO, as the case may be, the date of restructuring, for infrastructure projects depending upon the whichever is later reasons for such delay; ii) Beyond one years and upto two years from the original DCCO, for non-infrastructure projects (including real estate projects) (vi) In case of infrastructure projects, where Appointed Date (as defined in the concession agreement) is shifted due to the inability of the Concession Authority to comply with the requisite conditions, change in date of commencement of commercial operations (DCCO) need not be treated as ‘restructuring’, subject to following conditions: a) The project is an infrastructure project under public private partnership model awarded by a public authority; b) The loan disbursement is yet to begin; c) The revised date of commencement of commercial operations is documented by way of a supplementary agreement between the borrower and lender and; d) Project viability has been reassessed and sanction from appropriate authority has been obtained at the time of supplementary agreement. 4.2.15.3 Projects under Implementation – Change in Ownership 4.2.15.3.1 In order to facilitate revival of the projects stalled primarily due to inadequacies of the current promoters, if a change in ownership takes place any time during the periods quoted in Paragraph 4.2.15.2 above or before the original DCCO, banks may permit extension of the DCCO of the project up to two years in addition to the periods quoted at Paragraph 4.2.15.2 above, as the case may be, without any 19 change in asset classification of the account subject to the conditions stipulated in the following paragraphs. Banks may also consequentially shift/extend repayment schedule, if required, by an equal or shorter duration. 4.2.15.3.2 In cases where change in ownership and extension of DCCO (as indicated in Paragraph 4.2.15.3.1 above) takes place before the original DCCO, and if the project fails to commence commercial operations by the extended DCCO, the project will be eligible for further extension of DCCO in terms of guidelines quoted at Paragraph 4.2.15.2 above. Similarly, where change in ownership and extension of DCCO takes place during the period quoted in Paragraph 4.2.15.2(iii)(a) above, the account may still be restructured by extension of DCCO in terms of guidelines quoted at Paragraph 4.2.15.2(iv) above, without classifying the account as non-performing asset. 4.2.15.3.3 The provisions of Paragraphs 4.2.15.3.1 and 4.2.15.3.2 above are subject to the following conditions: a) Banks should establish that implementation of the project is stalled/affected primarily due to inadequacies of the current promoters/management and with a change in ownership there is a very high probability of commencement of commercial operations by the project within the extended period; b) The project in consideration should be taken-over/acquired by a new promoter/promoter group with sufficient expertise in the field of operation. If the acquisition is being carried out by a special purpose vehicle (domestic or overseas), the bank should be able to clearly demonstrate that the acquiring entity is part of a new promoter group with sufficient expertise in the field of operation; c) The new promoters should own at least 51 per cent of the paid up equity capital of stake in the acquired project. If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter should own at least 26 per cent of the paid up equity capital or up to applicable foreign investment limit, whichever is higher, provided banks are satisfied that with this equity stake the new non-resident promoter controls the management of the project; d) Viability of the project should be established to the satisfaction of the banks. e) Intra-group business restructuring/mergers/acquisitions and/or takeover/acquisition of the project by other entities/subsidiaries/associates etc. 20  (domestic as well as overseas), belonging to the existing promoter/promoter group will not qualify for this facility. The banks should clearly establish that the acquirer does not belong to the existing promoter group; f) Asset classification of the account as on the ‘reference date’ would continue during the extended period. For this purpose, the ‘reference date’ would be the date of execution of preliminary binding agreement between the parties to the transaction, provided that the acquisition/takeover of ownership as per the provisions of law/regulations governing such acquisition/takeover is completed within a period of 90 days from the date of execution of preliminary binding agreement. During the intervening period, the usual asset classification norms would continue to apply. If the change in ownership is not completed within 90 days from the preliminary binding agreement, the ‘reference date’ would be the effective date of acquisition/takeover as per the provisions of law/regulations governing such acquisition/takeover; g) The new owners/promoters are expected to demonstrate their commitment by bringing in substantial portion of additional monies required to complete the project within the extended time period. As such, treatment of financing of cost overruns for the project shall be subject to the guidelines prescribed in Paragraph 4.2.15.5 of this circular. Financing of cost overrun beyond the ceiling prescribed in Paragraph 4.2.15.5 of this circular would be treated as an event of restructuring even if the extension of DCCO is within the limits prescribed above; h) While considering the extension of DCCO (up to an additional period of 2 years) for the benefits envisaged hereinabove, banks shall make sure that the repayment schedule does not extend beyond 85 per cent of the economic life/concession period of the project; and i) This facility would be available to a project only once before achievement of DCCO and will not be available during subsequent change in ownership, if any. 4.2.15.3.4 Loans covered under this guideline would attract provisioning as per the extant provisioning norms depending upon their asset classification status. 4.2.15.4 Deemed DCCO 4.2.15.4.1 A project with multiple independent units may be deemed to have commenced commercial operations from the date when the independent units representing 50 per cent (or higher) of the originally envisaged capacity have 21  commenced commercial production of the final output as originally envisaged, subject to the following conditions: a. The units representing remaining 50 per cent (or lower) of the originally envisaged capacity shall commence commercial operations within a maximum period of one year from the deemed date of commencement of commercial operations; b. Commercial viability of the project is reassessed beyond doubt; and c. Capitalisation of interest obligation in respect of project debt component attributable to the units of the plant which have commenced commercial operations has to cease and the revenue expenditure is booked under revenue account. 4.2.15.4.2 In such cases, banks may, at their discretion, also effect a consequential shift in repayment schedule of the debt attributable to units which have not commenced commercial operations for equal or shorter duration (including the start date and end date of revised repayment schedule) i.e., one year, subject to no other changes being carried out. 4.2.15.4.3 If the remaining units do not commence commercial operations within the stipulated time of one year at paragraph 4.2.15.4.1 (a) above, the account shall be treated as non-performing asset and the provisions shall be made accordingly. 4.2.15.5 Financing of Cost Overruns for Projects under Implementation 4.2.15.5.1 Internationally, project finance lenders sanction a ‘standby credit facility’ to fund cost overruns if needed. Such ‘standby credit facilities’ are sanctioned at the time of initial financial closure; but disbursed only when there is a cost overrun. At the time of credit assessment of borrowers/project, such cost overruns are also taken into account while determining the project Debt Equity Ratio, Debt Service Coverage Ratio, Fixed Asset Coverage Ratio etc. Such ‘standby credit facilities’ rank pari passu with base project loans and their repayment schedule is also the same as that of the base project loans. 4.2.15.5.2 Accordingly, in cases where banks have specifically sanctioned a ‘standby facility’ at the time of initial financial closure to fund cost overruns, they may fund cost overruns as per the agreed terms and conditions. 22  4.2.15.5.3 Where the initial financial closure does not envisage such financing of cost overruns, banks are allowed to fund cost overruns, which may arise on account of extension of DCCO up to two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects (including commercial real estate projects) respectively, without treating the loans as ‘restructured asset’, subject to the following conditions: a) Banks may fund additional ‘Interest During Construction’, which may arise on account of delay in completion of a project; b) Other cost overruns (excluding Interest During Construction) up to a maximum of 10% of the original project cost; c) The Debt Equity Ratio as agreed at the time of initial financial closure should remain unchanged subsequent to funding cost overruns or improve in favour of the lenders and the revised Debt Service Coverage Ratio should be acceptable to the lenders; d) Disbursement of funds for cost overruns should start only after the Sponsors/Promoters bring in their share of funding of the cost overruns; and e) All other terms and conditions of the loan should remain unchanged or enhanced in favour of the lenders. 4.2.15.5.4 The ceiling of 10 per cent of the original project cost prescribed in Paragraph 4.2.15.5.3 (b) above is applicable to financing of all other cost overruns (excluding interest during construction), including cost overruns on account of fluctuations in the value of Indian Rupee against other currencies, arising out of extension of date of commencement of commercial operations. 4.2.15.6 Other Issues 4.2.15.6.1 All other aspects of restructuring of project loans before commencement of commercial operations would be governed by the provisions of Parts B1 and B2 of this Master Circular. Restructuring of project loans after commencement of commercial operations will also be governed by these instructions. 4.2.15.6.2 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: 23  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 DCCO. d) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch. 4.2.15.6.3 Multiple revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits stipulated at Paragraph 4.2.15.2(iv) above, and all other terms and conditions of the loan remained unchanged. 4.2.15.6.4 Banks, if deemed fit, may extend DCCO beyond the respective time limits stipulated at Paragraph 4.2.15.2(iv) above; however, in that case, banks will not be able to retain the ‘standard’ asset classification status of such loan accounts. 4.2.15.6.5 In all the above cases of restructuring where regulatory forbearance has been extended, the Boards of banks should satisfy themselves about the viability of the project and the restructuring plan. 4.2.15.7 Asset classification and Income recognition for projects under implementation relating to Deferment of DCCO and Cost Overruns 4.2.15.7.1 In cases where DCCO is extended within the periods stipulated in Paragraph 4.2.15.2 and funding of cost overruns complies with the thresholds/conditions stipulated in Paragraph 4.2.15.5, such loans shall be treated as ‘standard’ in all respects. 4.2.15.7.2 In cases where DCCO is extended within the periods stipulated in Paragraph 4.2.15.2, but funding of cost overruns does not comply with the thresholds/conditions stipulated in Paragraph 4.2.15.5, such loans shall be treated as ‘restructured standard’ and attract a provision of 5 per cent from the date of such restructuring till the commencement of commercial operations or 2 years from the date 24 of restructuring, whichever is later. These loans may be upgraded to ‘standard’ category once the entire project commences commercial operations. 4.2.15.7.3 In cases where DCCO is extended beyond the periods stipulated in Paragraph 4.2.15.2 (iii) but up to periods stipulated in Paragraph 4.2.15.2(iv) and funding of cost overruns complies with the thresholds/conditions stipulated in Paragraph 4.2.15.5, such loans shall be treated as ‘restructured standard’ and attract a provision of 5 per cent from the date of such restructuring till the commencement of commercial operations or 2 years from the date of restructuring, whichever is later. These loans may be upgraded to ‘standard’ category once the entire project commences commercial operations. 4.2.15.7.4 In cases where DCCO is extended beyond the periods stipulated in paragraph 4.2.15.2(iii) but up to periods stipulated in paragraph 4.2.15.2(iv) and funding of cost overruns does not comply with the thresholds/conditions stipulated in paragraph 4.2.15.5, such loans will be treated as ‘non-performing asset’. These loans may be upgraded to ‘standard’ category only after the account performs satisfactorily during the ‘monitoring period’ post DCCO; 4.2.15.7.5 Any changes to the major terms and conditions of the original project loans (i.e. promoters equity contribution, interest rate, etc.) of a borrower with financial difficulties, except what is specifically allowed such as changes in the DCCO, consequential parallel shift in repayment schedule and funding of cost overruns, as permitted within the thresholds, shall be treated as an event of ‘restructuring’ requiring the accounts to be classified as ‘non-performing asset’ and provided for accordingly. These loans may be upgraded to ‘standard’ category only after the account performs satisfactorily during the ‘monitoring period’ post DCCO. 4.2.15.7.6 Banks may treat need based working capital sanctioned to projects after commencement of commercial operations as ‘standard’ irrespective of the asset classification category of the project loans, subject to satisfactory performance of such working capital accounts. Banks shall ensure that assessment of working capital loans are strictly need based and banks shall desist from over-financing. If the project loans classified as ‘non-performing asset’ do not perform satisfactorily during the ‘monitoring period’ and therefore fail to get upgraded to ‘standard’ category, then the working capital loans also shall be placed in the same asset classification category as that of project loans on completion of ‘monitoring period’. 25  4.2.15.8 Income recognition 4.2.15.8.1 Banks may recognise income on accrual basis in respect of the projects under implementation, which are classified as ‘standard’. 4.2.15.8.2 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 i.e. on cash basis. 4.2.15.8.3 The regulatory treatment of FITL / debt / equity instruments created by conversion of principal / unpaid interest, as the case may be, shall be as per paragraph 21 of Part B2 of this Master Circular. 4.2.16 Post-shipment Supplier's Credit 4.2.16.1 In respect of post-shipment credit extended by the banks covering export of goods to countries for which the Export Credit Guarantee Corporation’s (ECGC) cover is available, EXIM Bank has introduced a guarantee-cum-refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC. 4.2.16.2 Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be treated as a non-performing asset for asset classification and provisioning purposes. 4.2.17 Export Project Finance 4.2.17.1 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. 4.2.17.2 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. 26 4.2.18 Transfer of Loan Exposures The asset classification and provisioning requirements in respect of transactions involving transfer of loans shall be as per the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021. 4.2.19 Credit Card Accounts 4.2.19.1 In credit card accounts, the amount spent is billed to the card users through a monthly statement with a definite due date for repayment. Banks give an option to the card users to pay either the full amount or a fraction of it, i.e., minimum amount due, on the due date and roll-over the balance amount to the subsequent months’ billing cycle. 4.2.19.2 A credit card account will be treated as non-performing asset if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date mentioned in the statement. 4.2.19.3 Banks shall report a credit card account as ‘past due’ to credit information companies (CICs) or levy penal charges, viz. late payment charges, etc., if any, only when a credit card account remains ‘past due’ for more than three days. The number of ‘days past due’ and late payment charges shall, however, be computed from the payment due date mentioned in the credit card statement. 5. PROVISIONING NORMS 5.1 General 5.1.1 The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. 5.1.2 In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraph 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. 27 5.2 Loss assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. 5.3 Doubtful assets 5.3.1 100 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. 5.3.2 In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful: Period for which the advance has Provisioning requirement (%) remained in ‘doubtful’ category Up to one year 25 One to three years 40 More than three years 100 5.3.3 With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of ₹5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors. 5.4 Substandard assets 5.4.1 A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available. 5.4.2 The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows. 28 5.4.3 The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly charged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc. 5.4.4 In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks' balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards: a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured. b) However, banks may treat annuities under build-operate-transfer (BOT) model in respect of road / highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable. c) It is noticed that most of the infrastructure projects, especially road/highway projects are user-charge based, for which the Planning Commission has published Model Concession Agreements (MCAs). These have been adopted by various Ministries and State Governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders regarding security of their debt. In view of the above features, in case of PPP projects, the debts due to the lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, subject to the following conditions: i. User charges / toll / tariff payments are kept in an escrow account where senior lenders have priority over withdrawals by the concessionaire; ii. There is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated; iii. The lenders have a right of substitution in case of concessionaire default; 29  iv. The lenders have a right to trigger termination in case of default in debt service; and v. Upon termination, the Project Authority has an obligation of (i) compulsory buy-out and (ii) repayment of debt due in a pre-determined manner. vi. In all such cases, banks must satisfy themselves about the legal enforceability of the provisions of the tripartite agreement and factor in their past experience with such contracts. d) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in "Notes to Accounts". This would differentiate such loans from other entirely unsecured loans. 5.5 Standard assets 5.5.1 The provisioning requirements for all types of standard assets stands as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis: a) Farm Credit to agricultural activities, individual housing loans and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent; b) advances to Commercial Real Estate (CRE)2 Sector at 1.00 per cent; c) advances to Commercial Real Estate – Residential Housing Sector (CRE - RH)3 at 0.75 per cent d) housing loans extended at teaser rates as indicated in Paragraphs 5.9.9; e) restructured advances – as stipulated in the prudential norms for restructuring of advances. f) Advances restructured and classified as standard in terms of the Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs, as updated from time to time, at 5%. g) All other loans and advances not included in (a) – (f) above at 0.40 per cent. 2 CRE as defined in terms of the circular DBOD.BP.BC.No.42/08.12.015/2009-10 dated September 9, 2009 on ‘Guidelines on Classification of Exposures as Commercial Real Estate (CRE) Exposures’ 3 CRE-RH as defined in the circular DBOD.BP.BC.No. 104/08.12.015/2012-13 dated June 21, 2013 on ‘Housing Sector: New sub-sector CRE (Residential Housing) within CRE & Rationalisation of provisioning, risk-weight and LTV ratios’ 30 5.5.2 The provisions on standard assets should not be reckoned for arriving at net NPAs. 5.5.3 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. 5.5.4 It is clarified that the Medium Enterprises will attract 0.40% standard asset provisioning. The definition of the terms Micro Enterprises, Small Enterprises, and Medium Enterprises shall be in terms of the circular FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020 on ‘Credit flow to Micro, Small and Medium Enterprises Sector’ as updated from time to time. 5.5.5 A high level of unhedged foreign currency exposures of the entities can increase the probability of default in times of high currency volatility. Hence, banks are required to estimate the riskiness of unhedged position of their borrowers as per the instructions contained in our Master Direction DOR.MRG.77/00-00-007/2022-23 dated October 11, 2022 titled ‘Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions'. and make incremental provisions on their exposures to such entities: Likely Loss / EBID (%) Incremental Provisioning Requirement on the total credit exposures over and above extant standard asset provisioning Up to 15 per cent 0 More than 15 per cent and up to 30 20 bps per cent More than 30 per cent and up to 50 40 bps per cent More than 50 per cent and up to 75 60 bps per cent More than 75 per cent 80 bps For this purpose, EBID, as defined for computation of DSCR = Profit After Tax + Depreciation + Interest on debt + Lease Rentals, if any. 5.6 Prudential norms on creation and utilisation of floating provisions 5.6.1 Principle for creation of floating provisions by banks 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. 31 5.6.2 Principle for utilisation of floating provisions by banks 5.6.2.1 The floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of non-performing 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. 5.6.2.2 To facilitate banks' Boards to evolve suitable policies in this regard, it is clarified that the extra-ordinary circumstances refer to losses which do not arise in the normal course of business and are exceptional and non-recurring in nature. These extra-ordinary circumstances could broadly fall under three categories viz. General, Market and Credit. Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category. Market category would include events such as a general melt down in the markets, which affects the entire financial system. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance. 5.6.2.3 In order to mitigate the adverse impact of COVID 19 related stress on banks, as a measure to enable capital conservation, banks are allowed to utilise 100 per cent of floating provisions held by them as on December 31, 2020 for making specific provisions for non- performing assets with prior approval of their Boards. Such utilisation is permitted up to March 31, 2022. 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 Banks should make comprehensive disclosures on floating provisions in the “notes on accounts” to the balance sheet on (a) opening balance in the floating provisions account, (b) the quantum of floating provisions made in the accounting year, (c) purpose and amount of draw down made during the accounting year, and (d) closing balance in the floating provisions account. 32 5.7 Additional Provisions at higher than prescribed rates 5.7.1 For NPAs The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs 5.7.2 For standard assets The provisioning rates prescribed in this Master Circular are the regulatory minimum and banks are encouraged to make provisions at higher rates in respect of advances to stressed sectors of the economy. In this regard, it is advised as under: (i) Banks shall put in place a Board–approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors. (ii) The policy shall require a review, at least on a quarterly basis, of the performance of various sectors of the economy to which the bank has an exposure to evaluate the present and emerging risks and stress therein. The review may include quantitative and qualitative aspects like debt-equity ratio, interest coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, legal/ regulatory issues faced by the sector, etc. The reviews may also include sector specific parameters. 5.8 Provisions on Leased Assets 5.8.1 Substandard assets (i) 15 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’. (ii) Unsecured (as defined in Paragraph 5.4 above) lease exposures, which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent. 33  5.8.2 Doubtful assets 100 percent of the extent to which the finance is not secured by the realisable value of the leased asset, should be provided for. 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: Period for which the advance has Provisioning remained in ‘doubtful’ category requirement (%) Up to one year 25 One to three years 40 More than three years 100 5.8.3 Loss assets 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. 5.9 Guidelines for Provisions under Special Circumstances 5.9.1 Advances against deposits/specific instruments Advances against term deposits, NSCs eligible for surrender, KVPs, gold ornaments, government & other securities and life insurance policies would attract provisioning requirements as applicable to their asset classification status. 5.9.2 Treatment of interest suspense account Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction. 5.9.3 Advances covered by ECGC guarantee In the case of advances classified as doubtful and guaranteed by ECGC, provision should be made only for the balance in excess of the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder: 34 Example: Outstanding Balance Rs. 4 lakhs ECGC Cover 50 percent Period for which the advance has More than 2 years remained remained doubtful doubtful (say as on March 31, 2014) Value of security held Rs. 1.50 lakhs Provision required to be made: Outstanding balance Rs. 4.00 lakhs Less: Value of security held Rs. 1.50 lakhs Unrealised balance Rs. 2.50 lakhs Less: ECGC Cover Rs. 1.25 lakhs (50% of unrealisable balance) Net unsecured balance Rs. 1.25 lakhs Provision for unsecured portion of Rs. 1.25 lakhs (@ 100 percent of advance unsecured portion) Provision for secured portion of advance Rs.0.60 lakhs (@ 40 per cent of the (as on March 31, 2012) secured portion) Total provision to be made Rs.1.85 lakhs (as on March 31, 2014) 5.9.4 Advance covered by guarantees under any existing or future schemes launched by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and National Credit Guarantee Trustee Company Ltd (NCGTC). In case the advance covered by any existing or future schemes/guarantees launched by CGTMSE, CRGFTLIH and NCGTC becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding, in excess of the guaranteed portion, should be provided for as per the extant guidelines on provisioning for non- performing assets. An illustrative example is given below: Example: Outstanding Balance ₹10 lakh CGTMSE/CRGFTLIH Cover 75% of the amount outstanding or 75% of the unsecured amount or ₹37.50 lakh, whichever is the least Period for which the advance More than 2 years remained doubtful has remained doubtful (say as on March 31, 2014) Value of security held ₹1.50 Value of security held ₹1.50 lakh lakh 35 Provision required to be made: Balance outstanding ₹10.00 lakh Less: Value of security ₹1.50 lakh Unsecured amount ₹8.50 lakh Less: CGTMSE/CRGFTLIH cover ₹6.38 lakh (75%) Net unsecured and uncovered portion: ₹2.12 lakh Provision for Secured portion @ 40% ₹0.60 lakh of ₹1.50 lakh Provision for Unsecured & uncovered ₹2.12 lakh portion @ 100% of ₹2.12 lakh Total provision required ₹2.72 lakh 5.9.5 Reserve for Exchange Rate Fluctuations Account (RERFA) When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated loans (where actual disbursement was made in Indian Rupee) which becomes overdue, goes up correspondingly, with its attendant implications of provisioning requirements. Such assets should not normally be revalued. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement, the following procedure may be adopted: a. The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account. b. In addition to the provisioning requirement as per Asset Classification, the full amount of the Revaluation Gain, if any, on account of foreign exchange fluctuation should be used to make provisions against the corresponding assets. 5.9.6 Provisioning for country risk 5.9.6.1 Banks shall make provisions, with effect from the year ending March 31, 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: Risk ECGC Provisioning category Requirement (per cent) Classification Insignificant A1 0.25 36  Low A2 0.25 Moderate B1 5 High B2 20 Very high C1 25 Restricted C2 100 Off-credit D 100 5.9.6.2 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. 5.9.6.3 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. However, in the case of ‘loss assets’ and ‘doubtful assets’, provision held, including provision held for country risk, may not exceed 100% of the outstanding. 5.9.6.4 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. 5.9.6.5 Banks may make a lower level of provisioning (say 25% of the requirement) in respect of short-term exposures (i.e. exposures with contractual maturity of less than 180 days). 5.9.7 Provisioning norms for Liquidity facility provided for Securitisation transactions The amount of liquidity facility drawn and outstanding for more than 90 days, in respect of securitisation transactions undertaken in terms of Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021, should be fully provided for. 5.9.8 Provisioning requirements for derivative exposures Credit exposures computed as per the current marked to market value of the contract, arising on account of the interest rate & foreign exchange derivative transactions, credit default swaps and gold, shall also attract provisioning requirement as applicable to the loan assets in the 37  'standard' category, of the concerned counterparties. All conditions applicable for treatment of the provisions for standard assets would also apply to the aforesaid provisions for derivative and gold exposures. 5.9.9 Provisioning for housing loans at teaser rates It has been observed that some banks are following the practice of sanctioning housing loans at teaser rates i.e. at comparatively lower rates of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been also observed that many banks at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates. Therefore, the standard asset provisioning on the outstanding amount of such loans has been increased from 0.40 per cent to 2.00 per cent in view of the higher risk associated with them. The provisioning on these assets would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’. 5.9.10 Provisioning requirement in terms of Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism In respect of specified borrowers, as per the provisions of the Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism dated August 25, 2016, banks shall make additional provisions of 3 percentage points over and above the applicable provision on the incremental exposure of the banking system in excess of Normally Permitted Lending Limit (NPLL) as defined in the said guidelines. This higher provisioning requirement shall be distributed in proportion to each bank’s funded exposure to the specified borrower. 5.10 Provisioning Coverage Ratio 5.10.1 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. 5.10.2 From a macro-prudential perspective, banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in