Prudential norms for Income recognition and asset classification

In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts.

• The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise,
• The provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained nonperforming and the availability of security and the realizable value thereof.
• Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed on the basis of cash flows with borrowers.

INCOME RECOGNITION

The policy of income recognition has to be objective and based on the record of recovery

• Income from nonperforming assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.
• However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
• Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.
• If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized.

Reversal of income

If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire interest accrued including fees, commission & similar income credited to income account in the past periods, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also.

(e.g. Suppose an advance had become NPA on 30/06/2013, but since the NPA is declared only when the interest due & charged is not served within next quarter, so it will be declared as NPA on 30/09/2013 if this happen, therefore at the close of the year whatever be the interest charged on that a/c after 30/06/2013 should be reversed)