RBI Issues Prudential Norms on Income Recognition, Provisioning Clarifications – Asset Classification And Pertaining To Advances

To ensure proper clarity and uniformity for all lending institutions, new RBI Clarification on Prudential Norms on Income Recognition, asset classification and provisioning norms of October 1st 2021 certain aspects are being clarified herewith. The first clarification is:

• On the specification of a due date, it will be treated as overdue if the amount is not paid within the due date; therefore, the proper date for repayment should be fixed during the sanction of the loan.•
• When the loans are in the nature of a revolvingfacility and the outstanding amount remains in excess of the sanctioned limit the basis for classification will be:
  1. if more than 30 days and less than 60 daysunder the SMA 1 category.
  2. if the delay is more than 60 days and up to 90days, they will be under the SMA 2 category.c.
• If a CC/OD account is ‘out of order,’ it is said as a non-performing asset (NPA). When the outstanding balance in the CC/OD account is less than the sanctioned limit, then the account should be treated as ‘out of order’ if there have been
  1. no credits for 90 days or;
  2. if the credits are insufficient to cover theinterest debited during the same period.c.
• When the outstanding balance in the CC/OD account is in excess of the sanctioned limit for 90 days, then again, the account should be treated as ‘out of order’.•
• Regarding the NPA classification in the case ofinterest payments, an account is classified as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. When it comes to interest payments on term loans, if the interest applied at stipulated rates is overdue for more than 90 days, the account will be categorised as NPA. 

(Effective from March 31st 2022) 

RBI Clarification on Prudential Norms on Income Recognition

• Loan accounts classed as non-performing assets (NPAs) can only be upgraded to ‘standard’ assets if the borrower pays all interest and principal arrears. 

• Income recognition policy for loans with a moratorium on payment of interest. When loans with moratorium are granted, lending institutions should recognise interest income on an accrual basis for accounts that are classed as ‘standard’. (This will be compared to the concept of “restructuring” in paragraph 1 of Annex-1 to the “Prudential Framework for Resolution of Stressed Assets” dated June 7th 2019.) 

• According to present guidelines, once an account is classed as NPA, all interest accrued and credited to the income account in previous periods must be reversed to the extent that it remains unrealized. 

• If loans with a moratorium on payment of interest become NPA after the moratorium period, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed. 

• The Consumer Education Lending institutions must provide consumer education literature on their websites clarifying the concepts of date of overdue, SMA and NPA categorization and upgradation and the front-line officers should also educate borrowers on all these concepts. 

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