Page 36 - Banking Finance AUGUST 2015

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performing when it ceases to generate income for the banks.
As per Wikipedia, A Non-Performing Asset (NPA) is defined
as a credit facility in respect of which the interest and/or
installment of principal has remained 'past due' for a specified
period of time. NPA is a classification used by financial
institutions that refer to loans that are in jeopardy of default.
Once the borrower has failed to make interest or principle
payments for 90 days, the loan is considered to be a non-
performing asset.
Non-performing assets are problematic for financial
institutions since they depend on interest payments for
income. Troublesome pressure from the economy can lead
to a sharp increase in non-performing loans and often results
in massive writedowns.
Recognition of NPAs
With a view to moving towards international best practices
and to ensure greater transparency, it has been decided to
adopt the '90 days' overdue norm for identification or
recognition of NPAs, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a Non-
Performing Assets (NPA) shall be a loan or an advance
where:
4 Interest and/or installment of principal remain overdue
for a period of more than 90 days in respect of a term
loan,
4 The account remains 'out of order' for a period of more
than 90 days, in respect of an Overdraft/Cash Credit
(OD/CC),
4 The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted,
4 Interest and/or installment of principal remains overdue
for two harvest seasons, but for a period not exceeding
two half years in the case of an advance granted for
agricultural purposes, and
4 Any amount to be received remains overdue for a
period of more than 90 days in respect of other
accounts.
As a facilitating measure for smooth transition to 90 days
norm, banks have been advised to move over to charging
of interest at monthly rest, by April 1, 2002. However, the
date of classification of an advance as NPA should not be
changed on account of charging of interest at monthly rests.
36 | 2015 | AUGUST
Banks should, therefore, continue to classify an account as
NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter
with effect from April 1, 2002 and 90 days from the end of
the quarter with effect from March 31, 2004.
The terms 'Out of Order' and 'Overdue'
have been defined as under:
Out of Order: An account should be treated as 'out of order'
if the outstanding balance remains continuously in excess
of the sanctioned limit/drawing power.
Overdue: Any amount due to the bank under any credit
facility is 'overdue' if it is not paid on the due date fixed by
the bank.
Banks have been advised by the Reserve Bank of India that
they should identify the non-performing assets and ensure
that interest on such non-performing assets is not
recognised as income and taken to the profit and loss
account.
Banks are to recognize their income on Accrual Basis in
respect of income on performing assets and on Cash Basis
in respect of income on non-performing assets. Any interest
accrued and credited to income account must be cancelled
by a reserve entry once the credit facility comes under the
category of non-performing assets.
When a non-performing assets may
become performing assets
An asset becomes non-performing when the interest and/
or installment of principal is delayed and is not received
before a stipulated time. In other words, an assets becomes
non-performing when it cease to generate income for
banks. A term loan is treated as non-performing assets
when interest and/or installment of principal remains
overdue for more than 90 days.
The identification of non-performing assets is to be done
on the basis of the position as on the balance sheet data. If
an account has been regularized before the balance sheet
date by payment of overdue amount through genuine
source (not by sanction of additional facilities or transfer of
funds between accounts) the account need not be treated
as non-performing assets. The bank should however, ensure
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