RBI has issued revised/ updated Master Circular on Prudential Norms for Income Recognition, Asset Classification (IRAC) and Provisioning pertaining to Advances, which consolidates the RBI Guidelines/ Directions/ Instructions/ Revisions on the subject upto 31/03/2022, as under:
RBI Master Circular 2022-2023/15 dt. 01/04/2022: Prudential norms on Income Recognition, Asset Classification (IRAC) and Provisioning pertaining to Advances (consolidated upto 31/03/2022)
RBI has implemented the Prudential Norms for the advances portfolio of the banks for greater consistency and transparency in the published accounts.
As per Prudential Norms, the income recognition policy should be objective and should enforce that income is recognised based on the record of recovery, instead of any subjective considerations. The banks are not supposed to charge/ debit interest in any NPA account and for taking to income account (i.e. income recognition), including for Government guaranteed accounts. However, interest on advances against Term Deposits/ NSC/ IVP/ KVP/ Life policies may be recognised on due date (i.e. without realisation), provided adequate margin is available.
Likewise, Banks are required to classify the non performing assets into three categories, i.e. Sub-standard, Doubtful or Loss Assets, based on the period for which the asset has remained non performing and/ or the dues have remained unrealised. Banks are required to conduct the exercise of classification of assets on the basis of objective criteria to ensure a uniform and consistent application of the Prudential Norms.
Also, the Bank Management and Statutory Auditors are responsible for ensuring that requisite/ adequate provisioning has been made, based on the ‘age of assets having been classified as NPA’ and the realisable value of the available security under respective accounts, for compliance with the Prudential Norms.
RBI Master Circular on Prudential (IRAC) Norms on Advances as on 30/09/2021 and Clarifications
Earlier, RBI had issued Master Circular on Prudential Norms for Income Recognition, Asset Classification (IRAC) and Provisioning pertaining to Advances, which consolidates the RBI Guidelines/ Directions/ Instructions/ Revisions on the subject upto 30/09/2021 and had subsequently issued certain clarifications on the related issues, as detailed here-under:
RBI Master Circular 2021-2022/104 dt. 01/10/2021: Prudential norms on Income Recognition, Asset Classification (IRAC) and Provisioning pertaining to Advances (consolidated upto 30/09/2021)
Further, RBI has issued various Notifications to clarify certain issues relating to IRAC norms, as under:
1) RBI Notification 2021-2022/125 dt. 12/11/2021: RBI has issued various Clarifications/ Instructions to supplement the Master Circular on IRAC Norms dt. 01/0/2021. All the instructions in this circular, except those at paragraphs 2, 8-9 and 13, shall be effective immediately from the date of this circular, whereas other instructions are required to be complied with latest by 31/03/0222. In this Circular RBI has issues clarifications/ instructions on the following issues:
i) Specific mention of exact due date/ repayment date, break up between principal and interest, examples of SMA/ NPA classification dates, in loan agreement to avoid misunderstandings;
ii) Guidelines on classification as Special Mention Account (SMA) and Non-Performing Asset (NPA) and that SMA classification norms are applicable to all loans, including retail loans;
iii) Clarification regarding definition of ‘out of order’ concept applicable in the case of Cash credit (CC)/ Overdraft (OD) accounts;
iv) Revised guidelines on NPA classification of loans in case of non-service/ payment of interest dues;
v) Clarifications on Upgradation of accounts which have been classified as NPAs;
vi) Clarifications on income recognition policy for loans with moratorium on payment of interest, etc.
2) RBI Notification 2021-2022/158 dt. 15/02/2022: In view of several queries received seeking certain clarifications, RBI has advised as under:
i) The definition of ‘out of order’, as clarified in the Circular, shall be applicable to all loan products being offered as an overdraft facility, including those not meant for business purposes and/ or which entail interest repayments as the only credits.
ii) The ‘previous 90 days period’ for determination of ‘out of order’ status of a CC/ OD account shall be inclusive of the day for which the day-end process is being run.
iii) In case of borrowers having more than one credit facility from a lending institution, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities.
iv) The circular does not make any changes to the requirements related to reporting of information to CRILC, which will continue to be governed in terms of extant instructions for respective entities1.
v) The circular does not, in any way, interfere with the extant guidelines on implementation of Ind-AS by NBFCs.
vi) Paragraph 10 of the Circular stipulates that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower. NBFCs shall have time till 30/09/2022 to put in place the necessary systems to implement this provision. All other instructions of the Circular shall continue to be applicable as per the timelines specified therein.
Annexure 6 on List of Circulars consolidated by the RBI’s Master Circular on IRAC Norms dt. 01/10/2021 has information on about 101 items (i.e. reference to Circulars issued during 1994 to 2020). I have a question that when RBI has last consolidated the Circular in 2015, then why the old circulars (i.e. prior to 2015) are being repeated? In case I have misunderstood then it is requested to kindly enlighten me. Thanks.