NPA when it ceases to generate income for the bank. This would mean that interest, which is debited to borrower’s account, has to be realised by the bank. An account has to be classified as NPA on the basis of record of recovery rather than security charged in favour of the bank in respect of such account. Thus, an account of a borrower may become NPA if interest charged to that particular borrower is not realised despite the account being fully secured.
RBI has laid down various criteria for classification of various types of advances as NPA which are as under:
Term Loan : Interest and /or instalment of principal remain overdue for a period of more than 90 days.
One will have to determine the due date of interest and instalment. If either interest or instalment is overdue for more than 90 days then the account would become NPA. Interest or instalment, which is due as on 30th December, would be overdue for more than 90 days as on 31st March and the account would become NPA.
However, if the same was due on 31st December of the previous year, then the account would not become NPA as on 31st March.
Overdraft/Cash Credit : If an account remains out of order, it would become NPA. For this purpose an account would be treated as ‘out of order’ if:
i) The outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days or more, or
ii) Even if the outstanding in the account is less than the sanctioned limit/ drawing power, there are no credits in the account continuously for 90 days as on the date of the Balance sheet, or
iii) Credits in the account are not sufficient to cover interest debited during the same period.
Thus, as on 31st March, if any of the above criteria is satisfied, the account would be classified as NPA.
There may be a situation where say for example drawing power of an account is Rs.10 lacs, balance is Rs.8 lacs and there are no credits in the account for 90 days. Such account would be classified as NPA.
If the bills purchased or discounted remains overdue for a period of more than 90 days from its due date.
Agricultural Advances: a loan granted for
i) Short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.
ii) Long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.
For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops would be treated as “short duration” crops. Thus an auditor will have to verify the nature/duration of crop circle and accordingly verify whether an agricultural account is NPA as on 31st March .
Other Credit Facility: In case of any other credit facility, if the amount to be received remains overdue for more than 90 days, then the account will be classified as NPA. Accounts with temporary deficiencies:
Even though criteria laid down for identification of an account as NPA are objective, an account should not be classified as NPA, if the deficiencies like non-submission of stock statement and, non-renewal of facility in the account are temporary in nature. RBI guidelines in this regard as under.
a) Drawing power is required to be arrived at based on the stock statement, which is current.
However, considering the difficulties of large borrowers, stock statements
relied upon by the banks for determining drawing power should not be older than three months.
The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower’s financial position is satisfactory.
Thus, if a borrower is allowed drawing on the basis of stock statement of September, the account will be classified as NPA as on 31st March.
b) Regular and adhoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should furnish evidence to show that renewal/review of credit limits is already on and would be completed soon. In any case, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ adhoc credit limits have not been reviewed/renewed within 180 days from the due date/date of ad hoc sanction will be treated as NPA.