Loans or assets that stop generating income for the bank is called as NPA.
- Key Criteria:
- Term loan overdue for >90 days.
- Overdrafts with no sufficient credits for 90 days or exceed limits.
- Bills overdue for >90 days.
- Agricultural loans overdue for 2 crop seasons (short-term crops) or 1 crop season (long-term crops).
- Technical NPAs:
- Old stock statements (3+ months) lead to irregular accounts.
- Non-renewal/review of credit limits within 180 days.
Asset Classifications
- Standard Assets:
- Performing loans with timely payments.
- Regular monitoring ensures compliance with sanction terms.
- Sub-Standard Assets:
- NPAs for <12 months.
- Recoverable but need action (cash recovery or technical resolution).
- Doubtful Assets:
- NPAs for >12 months.
- Collection is doubtful; security provision varies:
- Up to 1 year: 25%
- 1-3 years: 40%
- 3+ years: 100%.
- Loss Assets:
- Declared irrecoverable by auditors or RBI.
- Security value <10% of outstanding loan.
- Written off but may have residual recovery potential.
Provisioning Norms
- Banks must set aside funds for potential losses:
- Standard Assets: 0.25%-1.00%.
- Sub-Standard Assets: 15%-25%.
- Doubtful Assets: 25%-100% (based on security and duration).
- Loss Assets: 100%.
Consortium Lending
- Loans given by multiple banks.
- Asset classification depends on individual bank recoveries.
- Non-remittance by lead bank → NPA classification for other banks.
Security Valuation
- Ensures accurate provisioning:
- Stock valuations: Statements <3 months old.
- Immovable property: Revalued every 3 years.
Agricultural Advances (IRAC Norms)
- Short-Term Crops: Repayment due within 12 months.
- Long-Term Crops: Repayment due within 18 months.
- Overdue loans follow the NPA norms.
Compromise Settlement
- Agreement to recover dues when full repayment is unlikely.
- Scenarios for compromise:
- Borrower offers lump-sum payment.
- Time and cost for legal recovery > likely recovery.
- Insufficient securities/resources.
Monitoring NPAs
- Large accounts reviewed regularly:
- Rs. 50+ Cr: Board committee.
- Rs. 1 Cr to Rs. 50 Cr: Various internal committees.
- Below Rs. 1 Cr: Branch-level monitoring.
- Stock audits for working capital accounts Rs. 5 Cr+ annually.
Other Key Points
- Advances Against Term Deposits: Exempt from NPA classification if adequate margin exists.
- Fraud/Erosion in Security: If realizable security value is <50%, asset is “doubtful”; <10%, it’s a “loss asset.”
- Appropriation of Recoveries:
- Non-suit filed accounts: First to costs, then interest, lastly principal.
- Suit filed accounts: As per court directives.
MCQ
1. What is the period after which a term loan is classified as NPA if overdue?
a) 60 days
b) 90 days
c) 120 days
d) 180 days
Answer: b) 90 days
2. Which of the following is NOT a criterion for classifying overdraft accounts as NPA?
a) Outstanding balance exceeds the limit for 90 days.
b) No credits continuously for 90 days.
c) Turnover in the account covers interest charged.
d) Credits are insufficient to cover the interest debited during the period.
Answer: c) Turnover in the account covers interest charged.
3. Sub-standard assets are classified as NPAs for a period of less than:
a) 3 months
b) 6 months
c) 12 months
Answer: c) 12 months
4. What percentage of provisioning is required for unsecured sub-standard assets?
a) 10%
b) 15%
c) 25%
d) 100%
Answer: c) 25%
5. Loss assets are identified when:
a) Security value is less than 50% of the outstanding loan.
b) Security value is less than 10% of the outstanding loan.
c) The loan is overdue for more than 90 days.
d) No credits are made for 180 days.
Answer: b) Security value is less than 10% of the outstanding loan.
6. What is the provisioning requirement for doubtful assets secured for 1-3 years?
a) 25%
b) 40%
c) 50%
d) 100%
Answer: b) 40%
7. Advances against which of the following are exempt from being classified as NPAs?
a) Gold ornaments
b) Government securities
c) Term deposits
d) Immovable properties
Answer: c) Term deposits
8. For agricultural short-term crops, the loan becomes NPA if overdue for:
a) 6 months
b) 1 crop season
c) 2 crop seasons
d) 3 crop seasons
Answer: c) 2 crop seasons
9. Under consortium lending, if the lead bank fails to remit recoveries, the loan is classified as:
a) Standard asset
b) Sub-standard asset
c) NPA for the lead bank only
d) NPA for all member banks
Answer: d) NPA for all member banks
10. A stock valuation used for provisioning should not be older than:
a) 1 month
b) 3 months
c) 6 months
d) 12 months
Answer: b) 3 months
11. Which of the following sectors attracts a provisioning rate of 0.25% for standard assets?
a) SME
b) Commercial Real Estate
c) Housing loans under teaser rates
d) Agricultural loans
Answer: d) Agricultural loans
12. What is the first priority for appropriating recoveries in non-suit filed NPA accounts?
a) Principal amount
b) Costs and charges
c) Interest and penal interest
d) Legal expenses
Answer: b) Costs and charges
13. What is the maximum review period for working capital accounts with Rs. 10 Lakh to Rs. 1 Cr outstanding?
a) Quarterly
b) Bi-annually
c) Annually
d) Monthly
Answer: c) Annually
14. When should immovable properties held as security be revalued?
a) Annually
b) Every 2 years
c) Every 3 years
d) Every 5 years
Answer: c) Every 3 years
15. A compromise settlement is considered when:
a) Borrower pays the full outstanding.
b) Security value is above the loan amount.
c) Borrower offers a lump-sum payment, and legal recovery is costly.
d) The bank decides not to proceed with recovery.
Answer: c) Borrower offers a lump-sum payment, and legal recovery is costly.