“Prudential norms” are the guidelines and general norms issued by the banking regulator (the central bank) of the country for the proper and accountable functioning of banks and financial institutions. The provisioning requirements for all types of standard assets, sub-standard assets, Doubtful assets and Loss assets stands as below.
Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:
|Direct Agri. & SME sector||All other loans and advances||Commercial Real Estate||Teaser Rate
The provisions on standard assets should not be reckoned for arriving at net NPAs. They need not be netted from gross advances but shown separately as ‘Contingent Provisions against Standard Assets’ under ‘Other Liabilities and Provisions Others’ in Schedule-5 of the balance sheet.
Sub-standard Assets: A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.
|Secured Sub-Standard||Un-secured substandard where the value of security is not more than 10% right from the beginning.|
|15% of outstanding dues||25% of outstanding dues
(20% for infrastructure advances with escrow arrangement)
Doubtful assets: Period for which the advance has remained in ‘doubtful’ category is categorized as D1, D2 and D3 for provision requirement*:
|First 12 months||Next 24 months||Over 36 months|
|RVS||Shortfall in security||RVS||Shortfall in security||100% uniformly|
Loss Assets: The entire assets should be written off or if permitted to remain in the books for any reason, 100% of the outstanding should be provided for.
*Advances covered by ECGC/CGTMSE/ CRGFTLIH guarantees
In cases of advances classified as doubtful assets covered by ECGC /CGTMSE/ CRGFTLIH guarantees, provision should be made only for the balance in excess of the amount guaranteed amount. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision made as illustrated hereunder:
Suppose outstanding balance is 5 lakhs, value of security held is 2 lakh and ECGC cover is 50%. The account remained doubtful for more than 2 years.
In the above case;
Outstanding 5 lakhs – Less: Value of security held Rs. 2 lakhs= Rs.3 lakh
= > Unralised balance Rs.3 lakh Less: ECGC Cover Rs.1.50 lakh (50% of unrealisable balance) = 1.50 lakh (this is net unsecured balance)
Calculation of provision:
Provision for unsecured portion of advance 1.50 lakh (@ 100 percent of unsecured portion = 1.50 lakh
Provision for secured portion of advance 2 lakh is Rs.80000/-(@ 40 per cent of the secured portion).
Total provision Rs.1.50 lakh + Rs.80000= Rs.2.30 lakh
With the above method the calculation of provision for secured and unsecured credit can be worked out for advances covered by CGTMSE or Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH).