NPA Classification Norms: Bank Audit Perspective

What is NPA (Non-Performing Asset)?

For banks, advances given to their customers are assets. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

Categories of NPA

Banks are required to classify non-performing assets into different categories based on duration of their non-performance as under:

NPA Category	Description
Sub-standard Asset	An asset which has remained NPA for less than or equal to 12 months
Doubtful Asset	An asset which has remained in sub-standard category for 12 months
Loss Asset	An asset which is considered uncollectible and where loss has been identified by the bank or its auditors or RBI but the amount has not been written off wholly

Facility-wise NPA classification Norms as per RBI Master Circular on IRAC Norms dated 02-04-2024:

Facility Type	NPA Classification Norms
Term Loan	Interest and/or Principal remains overdue(01) for more than 90 days
Overdraft / Cash Credit	Account remains out of order(02)
Bill Purchased & Discounted	Bill remains overdue for more than 90 days
Long duration crop(03) loan	Interest or Principal remains overdue for 1 crop season
Short duration crop(04) loan	Interest or Principal remains overdue for 2 crop seasons
Securitisation Transactions(*)	Liquidity facility remains outstanding for more than 90 days
Derivative Transactions	Positive MTM remains unpaid for 90 days from due date

(*) undertaken in terms of RBI (Securitisation of Standard Assets) Directions, 2021

(01) Any amount due to the bank under any credit facility is said to be overdue if it is not paid to the bank on its due date. The said account will be flagged as overdue as part of day end process for the due date.

(02) A Cash Credit or Overdraft account shall be treated as out of order if any one of the below conditions is satisfied: 

• No credits in the account for a continuous period of 90 days
• Credits are not enough to cover the interest debited during the previous 90 days period including the day for which day end process is being run
• O/s Balance > Sanctioned Limit or Drawing Power for 90 days

(03) Long duration crops are crops with crop season longer than 1 year. It is to note that crop season for each crop will be determined by State Level Banker's Committee (SLBC) in each state.

(04) Short duration crops are crops other than long duration crops.

Certain specific provisions requiring classification of an account as NPA other than above norms:

1. Accounts with temporary deficiencies:
   The classification of asset as NPA should be based on Record of Recovery. Banks should not classify advance as NPA merely due to some temporary deficiencies except:
• In case of a working capital account, where drawing power is calculated based on stock statements older than 3 months, such an account will be deemed as irregular and
• Where a working capital account remains irregular for a continuous period of 90 days, it will be classified as NPA irrespective of its financial position.
• In case of an account where regular / ad-hoc credit limit has not been reviewed / renewed within 180 days from the due date / date of ad-hoc sanction it will be treated as NPA.
  
  
2. Erosion in value of Security / Frauds:
   In respect of accounts with serious credit impairment on account of erosion in value of security or non-availability of security or factors like frauds committed by borrowers, the said accounts should be straightaway classified as doubtful or loss assets as under:
• Where realizable value of security < 50% of Value assessed by bank or accepted by RBI in last inspection, the account may be straightaway classified as doubtful asset;
• Where realizable value of security < 10% of Outstanding in the account, the account may be straightaway classified as loss asset.
  
  
3. In cases of restructuring^(@):
• the accounts classified as 'standard' shall be immediately downgraded as NPA i.e. 'sub-standard' to begin with.
• NPA accounts, upon restructuring, would continue to have same asset classification as prior to restructuring.
  
  
4. Accounts regularized near about balance sheet date:
• Where such accounts indicate inherent weakness on the basis of the data available, the account should be deemed as NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularization of the account to eliminate doubts on their performing status.
  
  
5. Asset classification to be borrower-wise and not facility-wise:
• Where any one facility of the borrower is classified as NPA, all other accounts of the borrower to be classified as NPA irrespective of their performance.
• The bills discounted under LC favoring 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.
  
  
6. 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.
  
  
7. Credit Card Accounts:
• 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.
  
  
8. 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.

(@) Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. Restructuring may involve modification of terms of the advances / securities, which would generally include, among others, alteration of payment period / payable amount / the amount of instalments / rate of interest; roll over of credit facilities; sanction of additional credit facility/ release of additional funds for an account in default to aid curing of default / enhancement of existing credit limits; compromise settlements where time for payment of settlement amount exceeds three months.

Certain relaxations in NPA classification norms:

1. Advances against Term Deposits, NSCs, KVPs and Life Insurance Policies:
• Should not be treated as NPAs provided adequate margin is available in the accounts
• However, advances against gold ornaments, government securities and all other securities are not covered by this exemption.
  
  
2. Loans with moratorium for payment of interest:
• In case of advance to industrial projects, agricultural plantations, etc., where moratorium is available for payment of interest, interest becomes 'due' only after the moratorium or gestation period is over and not from the date of debit of interest in the account.
• In case of housing loan to bank staff, where interest is payable after recovery of principal, interest need not be considered overdue from the first quarter onwards. Such loans should be classified as NPA only when there is default in repayment of principal or interest on respective due dates.
  
  
3. Government guaranteed advances:
• 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 is not applicable in case of state government guaranteed advances.
  
  
4. Post-shipment supplier's credit with Export Credit Guarantee Corporation (ECGC) cover:
• In such cases, 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.
• 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.
  
  
5. Export project finance:
• 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.
  
  
6. Advances to Primary Agricultural Credit Societies (PACS) & Farmer's Service Societies (FSS) ceded to commercial banks:
• In respect of agricultural advances as well as advances for other purposes granted by banks to PACS or FSS under the on-lending system, only that particular credit facility granted to PACS or FSS which is in default will be classified as NPA and not all the credit facilities sanctioned to a PACS or FSS.

Note: This article does not discuss the NPA classification in respect of advances for commercial projects under implementation