Page 210 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 13: Non Performing Assets

“An asset (advance) is considered as non-performing in case if interest or installments of principal Notes
or both remain unpaid for more than two quarters and if it has come past due, i.e., 30 days after
the due date.”
An advance is to be classified as ‘sub-standard’ if it remains NPAs up to a period of two years and
will be classified as ‘Doubtful’ if it remains NPA for more than two years (which was reduced to
18 months from the year ending 31st March 2001). An account will be classified as ‘loss’ without
any waiting period where the dues are considered uncollectible or only marginally collectible.

In order to move towards international best practices and impart greater transparency, it was
decided by the RBI to introduce classification of loans as non-performing when interest and/or
installments of principal remain overdue for a period of more than 90 days from the year ending
March 31, 2004.

Self Assessment

Fill in the blanks:
4. RBI introduced in .................... the Health Code System for commercial banks.

5. An advance is to be classified as ‘sub-standard’ if it remains NPAs up to a period of
........................

13.3 Classification of NPAs

Banks should classify their assets into the following broad groups, namely -
Standard Assets
Sub-standard Assets

Doubtful Assets
Loss Assets
13.3.1 Standard Assets

Standard Asset is one which does not reveal any problems and which does not carry more than
normal risk attached to the business. Such an asset should not be an NPA.

13.3.2 Sub-standard Assets

(a) W.e.f. March 31, 2005 an asset would be classified as sub-standard if it stayed NPA for a
period less than or equal to 12 months. In these cases, the current net worth of the borrowers
of the current market value of the security charged is not enough to check recovery of the
dues to the banks in full. Putting it differently, such assets will have well defined credit
weaknesses that threaten the extermination of the debt and are characterised by the distinct
possibility that the banks will suffer some loss, if deficiencies are not corrected.
(b) An asset where the terms of the loan agreement concerning interest and principal have
been rescheduled after commencement of production should be classified as sub-standard
and should remain in such category for at least 12 months of satisfactory performance
under the rescheduled terms. In other words, the categorization of an asset should not be
upgraded just as a result of rescheduling, unless there is an acceptable compliance of this
condition.

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