In case Standard Assets the banks have to make a general provision of 0.4% on all its financial assets except in respect of those extended to the priority sectors like Agriculture and Small & Medium Enterprise , where it is 0.25%. In case of Commercial Real Estate it is 100%
If the asset is classified as a “Special Mention Account” [ i.e where the borrower does not pay dues for 90 days after end of a quarter] and migrates into a Sub-standard Asset, then the bank is obliged to make the following provisions in its books of account.
- 15% of Outstanding Amount, in case of Secured Loans and
- 25% of Outstanding amount in case of Unsecured Loans
If categorized as a “Doubtful Asset” and this condition remains, as it is, till the end of the 3rd year, then the bank is duty bound to provide for the following.
- During the first year: 25% of Outstanding Amount in case of Secured Loans and 100% of Outstanding amount in case of Unsecured Loans
- During the second and third years: 40% of Outstanding Amount in case of Secured Loans and 100% of Outstanding Amount in case of Unsecured Loans
- Beyond three years: 100% of Outstanding Amount in case of both , Secured and Unsecured Loans
If the loan is not repaid even after it remains as a sub-standard asset for more than 3 years and is classified as a “Loss Asset”, it will be written off if so reported by the Internal and/or Statutory Auditors of the Bank.
A working example
Ram avails a medium term loan on April 1, 2012. Its due date is March 31, 2013. Ram defaults in servicing the debt. The classification based on the migration of the status of the asset.
- It will be classified as an Standard Asset from April 1, 2012 till March 31, 2013 [Due Date]
- It will be deemed as a Special Mention Account From April 1, 2013 till June 29, 2013 [90 days]
- It will categorized as a Sub-standard Asset, from June 30, 2013 till June 29, 2014 [12 months]
- It will be classified as a Doubtful Asset from June 30, 2014 till June 29, 2015 [ 12 months]
The said loan may remain classified as a Doubtful Asset for a period of 3 years, commencing from 12 months of it being classified as an NPA, but once the auditors identify it as a loss, it will be assigned a Loss Asset.
More on the subject follows….
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