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Presentation on theme: "IMPLEMENTATION OF BASEL CAPITAL REQUIREMENTS IN INDIA"— Presentation transcript:


1988 : Basel Accord (Basel-I) 1993 Proposal: Standard Model 1996 Modification: Internal Model New Basel Accord (Basel-II) Revised New Accord (Basel-III)

The purpose of prescribing Capital adequacy requirements - Capital serves as a backbone for every Industry. It provides for a buffer against bank losses - It provides protection to its creditors in the event of bank fails Providing adequate capital serves as a disincentive for excessive risk taking.

The Revised Framework provides a range of options for determining the capital requirements for credit risk and operational risk so as to allow banks and supervisors to select approaches that are most appropriate for their operations and financial markets.

The first Basel Accord (Basel-I) was completed in 1988 : 1)The purpose was to prevent international banks from building business volume without adequate capital backing 2) The focus was on Credit Risk 3) Sets minimum capital standards for banks 4) Became effective at the end of 1992 5)Basel-I was hailed for incorporating risk into the calculation of capital requirements

6 WHY BASEL-I WAS NEEDED? The reason was to create a level playing field for “Internationally active Banks” Banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans

Capital adequacy ratio is also called as “Cooke Ratio. It has been named after Mr. Peter Cooke (Bank of England), the Chairman of the Basel committee) Cooke Ratio=Capital/ Risk Weighted Assets≥8%, i.e., Capital Adequacy Ratio Definition of Capital Capital= Core Capital + Supplementary Capital - Deductions

Capital was set at 8% and was adjusted by a loan’s credit risk weights Credit risk was divided into different categories: 0% to 125% respectively Commercial loans, for example, were assigned to the 100% risk weight category

To calculate required capital, a bank would multiply the assets in each risk category by the category’s risk weight and then multiply the result by 8% Thus a Commercial Loan for Rs , would attract 100% risk weight and is to be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs. 8.00

Core Capital (Tier I Capital) i) Paid Up Capital ii) Disclosed Reserves (General and Legal Reserves) Supplementary Capital (Tier II Capital): i) General Loan-loss Provisions (Restricted to 1.25% of RWA) ii) Undisclosed Reserves (other provisions against probable losses) iii) Asset Revaluation Reserves iv) Subordinated Term Debt (5+ years maturity) v) Hybrid (debt/equity) instruments Tier II Capital would be restricted to 100% of the Tier I Capital.

Investments in unconsolidated banking and financial subsidiary companies and investments in the capital of other banks & financial institutions Goodwill, Intangible Assets and Deferred tax Assets.

TIER 1 Paid-up share capital/common stock Disclosed reserves (legal reserves, surplus and/or retained profits)

TIER 2 Undisclosed reserves (bank has made a profit but this has not appeared in normal retained profits or in general reserves of the bank.) Asset revaluation reserves (when a company has an asset revalued and an increase in value is brought to account) General Provisions (created when a company is aware that a loss may have occurred but is not sure of the exact nature of that loss) /General loan-loss reserves Hybrid debt/equity instruments (such as preferred stock) Subordinated debt

0% Risk Weightage Cash, Balances with RBI Investments in Govt. Securities, Investments in other approved securities guaranteed by Central/ State Governments. Investments in other securities where payment of interest and repayment of principal are guaranteed by Central Govt. (This includes instruments such as Indira/Kisan Vikas Patra (IVP/KVP) and investments in Bonds and Debentures, where payment of interest and principal is guaranteed by Central Govt.) However, where Government Guaranteed securities have remained in default for a period exceeding 90 days, banks should assign 100% risk weight. However, the banks need to assign 100% risk weight only on those State Government guaranteed securities issued by the defaulting entities and not on all the securities issued or guaranteed by that State Government.

20% Risk Weightage Balances in current account with other banks , Claims on Commercial Banks Investments in other approved securities where payment of interest and repayment of principal are not guaranteed by Central/State Governments Investments in bonds issued by other banks Investments in securities which are guaranteed by banks as to payment of interest and repayment of principal.

50 % Risk Weightage Investment in Mortgage Backed Securities (MBS) of residential assets of Housing Finance Companies (HFCs), which are recognised and supervised by National Housing Bank Investment in Mortgage Backed Securities (MBS), which are backed by housing loan qualifying for 50% risk weight Investment in securitised paper pertaining to an infrastructure facility. Loans up to Rs. 1 lakh against gold and silver ornaments Advances covered by DICGC/ECGC

Investments in subordinated debt instruments and bonds issued by other banks or Public Financial Institutions for their Tier II capital Deposits placed with SIDBI/NABARD in lieu of shortfall in lending to priority sector. Investments in debentures/ bonds/ security receipts/ Pass Through Certificates issued by Securitisation Company/ SPVs/ Reconstruction Company and held by banks as investment All other investments including investments in securities issued by PFIs. NPA Investment purchased from other banks Premises, plant and equipment and other fixed assets

125% Risk Weightage Direct investment in equity shares, convertible bonds, debentures and units of equity oriented mutual funds including those exempted from Capital Market Exposure Housing loans of Rs. 75 lakh and above sanctioned to individuals Consumer credit including personal loans and credit cards Capital Market Exposures

Off-Balance Sheet items The credit risk exposure attached to off-Balance Sheet items has to be first calculated by multiplying the face value of each of the off-Balance Sheet items by ‘credit conversion factors. This will then have to be again multiplied by the weights attributable to the relevant counter-party . The credit conversion factors range from 20% to 100% depending upon the type and nature of the off balance sheet item.

20 CRITIQUE OF BASEL-I Basel-I accord was criticized i) for taking a too simplistic approach to setting credit risk weights and ii) for ignoring other types of risk

Risk weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset Risk weights did not flow from any particular insolvency probability standard, and were for the most part, arbitrary.

The requirements did not explicitly account for operating and other forms of risk that may also be important Except for trading account activities, the capital standards did not account for hedging, diversification, and differences in risk management techniques

Total Risk= Credit Risk+ Market Risk Market Risk= General Market Risk+ Specific Risk General Market Risk= Interest Rate Risk+ Currency Risk+ Equity Price Risk + Commodity Price Risk Specific Risk= Instruments Exposed to Interest Rate Risk and Equity Price Risk

Internal Model → Value at Risk Methodology Tier III Capital (Only for Market Risk) i) Long Term subordinated debt ii) Option not to pay if minimum required capital is <8%

Advances in technology and finance allowed banks to develop their own capital allocation (internal) models in the 1990’s This resulted in more accurate calculations of bank capital than possible under Basel-I These models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank

Internal models allow banks to more finely differentiate risks of individual loans than is possible under Basel-I Risk can be differentiated within loan categories and between loan categories Allows the application of a “capital charge” to each loan, rather than each category of loan For instance, it may appear to be good business to originate risky loans with their accompanying high interest rates. However, if the internal models calculate that these loans default more and thus need more capital charged against them, the loans may not be as profitable as lower risk, lower earning loans that require far less capital.

Banks discovered a wide variation in credit quality within risk-weight categories Basel-I sums all commercial loans into the 8% capital category Internal models calculations can lead to capital allocations on commercial loans that varies (from 1% to 30%) depending on the loan’s estimated risk


By the late 1990s, growth in the use of regulatory capital arbitrage led the Basel Committee to begin work on a new capital regime (Basel-II) Effort focused on using banks’ internal rating models and internal risk models June 1999: Committee issued a proposal for a new capital adequacy framework to replace the 1998 Accord

30 Basel I to Basel II Minimum capital requirements → 3 Pillars
New credit risk approaches Market risk - unchanged Add operational risk portion

31 The Basel II Framework Pillar 1: Minimum capital requirements
Credit Risk Market Risk Operational Risk Pillar 1: Minimum capital requirements A guiding principle for banking supervision Disclosure requirements Pillar 2: Supervisory review Pillar 3: Market discipline

32 Pillar 1: Minimum Capital Requirements
The calculation of regulatory minimum capital requirements:

33 Pillar 2: Supervisory Review
Principle 1: Banks should have a process for assessing and maintaining their overall capital adequacy. Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies.

34 Pillar 3: Market Discipline
The purpose of pillar three is to complement the pillar one and pillar two. Develop a set of disclosure requirements to allow market participants to assess information about a bank’s risk profile and level of capitalization.

35 Calculation of Capital
Tier One Capital the ordinary share capital (or equity) of the bank; and audited revenue reserves e.g.. retained earnings; less current year's losses; future tax benefits; and intangible assets, e.g., goodwill.

36 Calculation of Capital
Lower Tier Two Capital Subordinated debt with a term of at least 5 years; Sedeemable preference shares which may not be redeemed for at least 5 years.

37 Total Capital This is the sum of tier 1 and tier 2 capital less the following deductions: equity investments in subsidiaries; shareholdings in other banks that exceed 10 percent of that bank's capital; unrealized revaluation losses on securities holdings.

38 Calculation of Capital
Upper Tier Two Capital Un-audited retained earnings; revaluation reserves; general provisions for bad debts; perpetual cumulative preference shares (i.e. preference shares with no maturity date whose dividends accrue for future payment even if the bank's financial condition does not support immediate payment); perpetual subordinated debt (i.e. debt with no maturity date which ranks in priority behind all creditors except shareholders).

39 The Capital and Assets Definition of capital:
Tier 1 capital + Tier 2 capital + adjustments Total risk-weighted assets are determined by: multiplying the capital requirements for market risk and operational risk by 12.5 and adding the resulting figures to the sum of risk-weighted assets for credit risk.

40 BASEL-II Basel-II consists of three pillars:
Minimum capital requirements for credit risk, market risk and operational risk—expanding the 1988 Accord (Pillar I) Supervisory review of an institution’s capital adequacy and internal assessment process (Pillar II) Effective use of market discipline as a lever to strengthen disclosure and encourage safe and sound banking practices (Pillar III)

Implementation of the Basel II Framework continues to move forward around the globe. A significant number of countries and banks have already implemented the standardized and foundation approaches as of the beginning of 2007. In many other jurisdictions, the necessary infrastructure (legislation, regulation, supervisory guidance, etc) to implement the Framework is either in place or in process, which will allow a growing number of countries to proceed with implementation of Basel II’s advanced approaches in 2008 and 2009. This progress is taking place in both Basel Committee member and non-member countries.

42 BASEL-II (1) Minimum Capital Requirement (MCR)

43 BASEL-II (2) PILLAR I: Minimum Capital Requirement
Capital Measurement: New Methods Market Risk: In Line with 1993 & 1996 proposals Operational Risk: Working on new methods

44 BASEL-II (3) Pillar I is trying to achieve
If the bank’s own internal calculations show that they have extremely risky, loss-prone loans that generate high internal capital charges, their formal risk-based capital charges should also be high Likewise, lower risk loans should carry lower risk-based capital charges

45 BASEL-II (4) Credit Risk Measurement
1) Standard Method: Using external rating for determining risk weights 2) Internal Ratings Method (IRB) a) Basic IRB: Bank computes only the probability of default b) Advanced IRB: Bank computes all risk components (except effective maturity)

46 BASEL-II (5) Operational Risk Measurement 1) Basic Indicator Approach
2) Standard Approach 3) Internal Measurement Approach

47 BASEL-II (6) Pillar I also adds a new capital component for operational risk Operational risk covers the risk of loss due to system breakdowns, employee fraud or misconduct, errors in models or natural or man-made catastrophes, among others Operational risk events can be quite expensive. Citibank and JP Morgan Chase suffered large losses from Enron and MCI, the Royal Bank of Scotland took a very large fraud loss at their American subsidiary All First Financial.

48 BASEL-II (7) PILLAR 2: Supervisory Review Process
Banks are advised to develop an internal capital assessment process and set targets for capital to commensurate with the bank’s risk profile Supervisory authority is responsible for evaluating how well banks are assessing their capital adequacy

49 BASEL-II (8) PILLAR 3: Market Discipline
Aims to reinforce market discipline through enhanced disclosure by banks. It is an indirect approach, that assumes sufficient competition within the banking sector.

50 ASSESSING BASEL-II To determine if the proposed rules are likely to yield reasonable risk-based capital requirements within and between countries for banks with similar portfolios, four quantitative impact studies (QIS) have been undertaken

51 Credit Risk Standardised Approach Foundation IRB Approach
Advanced IRB Approach

52 Credit Risk - Standardised Approach
In determining the risk weights in the standardised approach, banks may use assessments by external credit assessment institutions.

53 Risk Weight for Assets Credit Assessment Claims on sovereigns
Claims on sovereigns Claims on banks and securities firms Claims on corporates Risk Weight Credit assessment of Sovereign Credit assessment of Banks Risk weight Risk weight for short-term AAA to AA- 0% 20% AAA -20% AA- 30% A+ to A- 50% BBB+ to BBB- 100% BB+ to BB- 150% B+ to B- Below B- Unrated -

54 Credit Risk - IRB Approach
In the internal ratings-based(IRB) approach, it’s based on banks’ internal assessment. The approach combines the quantitative inputs provides by banks and formula specified by the Committee.

55 Credit Risk - IRB Approach
Data Input Foundation IRB Advanced IRB Probability of default (PD) From banks Loss given default (LGD) Set by the Committee Exposure at default (EAD) Maturity (M) Set by the Committee or from banks

56 Market Risk Standardised method - the standards of the Committee
Internal models - use banks’ internal assessments - Value at Risk (VaR)

57 Operational Risk The risk of losses results from inadequate or failed internal processes, people and system, or external events. Basic Indicator Approach Standardised Approach Advanced Measurement Approaches(AMA)

58 Operational Risk - Basic Indicator Approach
GI = average annual gross income(three years, excepted the negative amounts) α = 15%

59 Operational Risk - Advanced Measurement Approaches
Under the AMA, the regulatory capital requirement will equal the risk measure generated by the bank’s internal operational risk measurement system using the quantitative and qualitative criteria for the AMA. Use of the AMA is subject to supervisory approval.

Results of the QIS studies have been troubling Wide swings in risk-based capital requirements Some individual banks show unreasonably large declines in required capital As a result, parts of the Basel II Accord have been revised

The practices in Basel II represent several important departures from the traditional calculation of bank capital The very largest banks will operate under a system that is different than that used by other banks The implications of this for long-term competition between these banks is uncertain, but merits further attention

Basel II’s proposals rely on banks’ own internal risk estimates to set capital requirements This represents a conceptual leap in determining adequate regulatory capital For regulators, evaluating the integrity of bank models is a significant step beyond the traditional supervisory process

Despite Basel II’s quantitative basis, much will still depend on the judgment 1) of banks in formulating their estimates , and 2) of supervisors in validating the assumptions used by banks in their models

64 Credit Risk - IRB Approach
Four quantitative inputs (risk components): Probability of default (PD) Loss given default (LGD) Exposure at default (EAD) Maturity (M) Use formula of the Committee to calculate the minimum requirements.

65 Supervisory Review Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios. Principle 4: Supervisors should intervene at an early stage to prevent capital from falling below the minimum levels.

66 Operational Risk - Standardised Approach
GI 1-8 = average annual gross income from business line from one to eight (three years, excepted the negative amounts) β = A fixed percentage set by the Committee

67 What is Basel III Basel III, released in December, 2010  is the third in the series of Basel Accords.  These accords deal with risk management aspects for the banking sector.  In a nut shell, Basel III is the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk. (Basel I and Basel II are the earlier versions of the same, and were less stringent)

68 Basel-III Thus, Basel-III is only a continuation of efforts initiated by the Basel Committee on Banking Supervision (BCSB) to enhance the banking regulatory framework under Basel I and Basel II.   This latest Accord seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency.

69 Basel-III Basel-III measures aim to:
→  improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever be the source →  improve risk management and governance practices →  strengthen banks' transparency and disclosures.

70 Impact of Basel-III on Indian Baking System
The Basel III, which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for the GOI.  It is estimated that Indian banks will be required to raise Rs 6,00,000 crores in external capital in next nine years or so, i.e. , by 2020 (The estimates vary from organisation to organisation).   Expansion of capital to this extent will affect the returns on the equity of these banks especially public sector banks.  However, only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum.

71 Basel-III The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.  Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas. Pillar 2 :  Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face. Pillar 3: Market Discipline :   Increasing the disclosures that banks must provide to increase the transparency of banks

72 How Basel-III differs from earlier versions
What are the Major Changes Proposed in Basel III over earlier Accords, i.e., Basel I and Basel II? What are the Major Features of Basel III ?  (a) Better Capital Quality :  One of the key elements of Basel-III is the introduction of  much stricter definition of capital.  Better quality capital means the higher loss-absorbing capacity of the Bank. This in turn  means that banks would be stronger, allowing them to better withstand during the periods of stress.

73 How Basel-III differs from earlier versions
(b) Capital Conservation Buffer:    - Another key feature of Basel-III is that now banks will be required to hold a capital conservation buffer of 2.5%. The aim of  conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.

74 How Basel-III differs from earlier versions
(c) Countercyclical Buffer:   This is also one of the key elements of Basel III.  The countercyclical buffer has been introduced with the objective to increase capital requirements in good times and decrease the same  in bad times.  The buffer will slow banking activity when it overheats and will encourage lending when times are tough, i.e., in bad times. The buffer will range from 0% to 2.5%, consisting of common equity or other fully loss-absorbing capital.

75 How Basel-III differs from earlier versions
(d) Minimum Common Equity and Tier 1 Capital Requirements :   The minimum requirement for common equity, the highest form of loss-absorbing capital, has been raised under Basel- III from  2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current minimum of 4% to 6%. Although the minimum total capital requirement will remain at the current 8% level, yet the required total capital will increase to 10.5% when combined with the conservation buffer.

76 How Basel-III differs from earlier versions
(e) Leverage Ratio:     A review of the financial crisis of 2008 has indicated  that the value of many assets fell quicker than assumed from historical experience.  Thus, now Basel III rules include a leverage ratio to serve as a safety net.  A leverage ratio is the relative amount of capital to total assets (not risk-weighted assets).  This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3%  leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.

77 How Basel-III differs from earlier versions
(f) Liquidity Ratios:  Under Basel III, a framework for liquidity risk management will be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio are to be introduced in 2015 and 2018, respectively. (g) Systemically Important Financial Institutions (SIFI) : As a part of the macro-prudential framework, systemically important banks will be expected to have loss-absorbing capability beyond the Basel III requirements. Options for implementation include capital surcharges, contingent capital and bail-in-debt.

78 Comparison of Capital Requirements under Basel II & III
Minimum Ratio of Total Capital To RWAs 8% 10.50% Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00% Tier I capital to RWAs 4% 6.00% Core Tier I capital to RWAs 5.00% Capital Conservation Buffers to RWAs None 2.50% Leverage Ratio 3.00% Countercyclical Buffer 0% to 2.50% Minimum Liquidity Coverage Ratio TBD (2015) Minimum Net Stable Funding Ratio TBD (2018) Systemically important Financial Institutions Charge TBD (2011)

Reserve Bank of India decided in April 1992 to introduce a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure. Under the system, the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis.

In June 2004, Reserve Bank issued guidelines to banks on maintenance of capital charge for Market Risks on the lines of ‘Amendment to the Capital Accord to incorporate market risks’ issued by the BCBS in 1996. BCBS released the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" on June 26, 2004. The Revised Framework was further updated in November 2005.


82 Module D Capital Management

83 Loans & Advances Provisioning Norms
State Bank Institute of Rural Development, Hyderabad Welcomes you To a presentation on RISKS IN AGRICULTURAL LOANS Borrower as defaulter. Knowing who is a defaulter and bringing him back to regular borrower. Advances, which are assets turning to NPAs. What are IRAC norms in Agricultural segment. And how to convert these NPAs back to assets. Let us go into details of these concepts.

RBI introduced IRAC norms in the year Based on recommendations of Narasihmam committee To be in line with the international practices and To move towards greater consistency & transparency in balance sheets of banks. Evolution of concept of IRAC norms: In line with the international practices for asset classification and as per the recommendations made by the Narasihman committee on Financial Systems, Reserve Bank of India has introduced norms for Income Recognition, Asset Classification and Provisioning (IRAC) during the year so as to move towards greater consistency and transparency in the Balance Sheets of the banks. Accordingly our Bank has also adopted these norms w.e.f 31st March 1993.

85 UNDER IRAC NORMS… The income is not recognized on accrual basis as was done prior to , but is recognized based on the record of actual recovery. And The assets are classified into different categories mainly based on record of recovery. The letters IRAC denote, Income, Recognition, Asset and Classification & Provisioning. UNDER IRAC NORMS The income is not recognized on accrual basis but is recognized based on the bank’s record of actual recovery. That means interest accrued in borrower’s account is not considered, but actual interest received from borrower is considered for this purpose. Secondly,   The assets are classified into different categories based on objective criteria. Asset classification norms are different for agriculture and other market segments.

Assets are broadly classified into two main categories. They are; Performing Assets and Non-performing Assets.

87 PERFORMING ASSETS: to the Bank on an actual realisation basis.
Assets which are earning income to the Bank on an actual realisation basis. These include regular and temporarily irregular accounts. Now let us see What is meant by performing assets? As per RBI norms, the Performing Assets are those which are earning income to the Bank on an actual realisation basis. These include regular and temporarily irregular accounts. Similarly, the meaning of Non-performing assets is like this. An asset becomes Non-Performing when it ceases to generate income for the bank on an actual realisation basis.

An asset becomes non-performing when it ceases to generate income for the bank on an actual realization basis.

SUB STANDARD NPA Age upto1year DOUBTFUL NPA Age > 1 yr LOSS Not linked to age STANDARD DOUBTFUL-1 (DA-1) Doubtful for < or = 1 Yr Under IRAC norms the assets are further classified into the following 4 categories: 1)    Standard Assets 2)    Sub-standard Assets 3)    Doubtful Assets and 4)    Loss Assets. Now let us discuss about each one of these categories. DOUBTFUL-2 (DA-2)Doubtful for >1 & = 3 Yrs DOUBTFUL-3 (DA-3) Doubtful for > 3Yrs

90 STANDARD ASSET: A standard asset is one which
does not disclose any problem and also does not carry more than normal risks attached to the business. Let us start with Standard Assets. A standard asset is one which does not disclose any problem and also does not carry more than normal risks attached to the business. Such an asset is not an NPA. A sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months.

91 SUB–STANDARD ASSET: It is a Non-Performing Asset. A sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. Eg: If an asset slips down to NPA category on , it would be in Sub-Standard category for next one year i.e. up to On it would further slip down to Doubtful category.

An asset would be classified as doubtful if it remains in the sub-standard category for more than 12 months. Example: If an account has become Sub-Standard on , it would slip down to Doubtful category on

STANDARD Normal movement Erosion in realisable value of security SUB-STANDARD Normal movement DOUBTFUL Further, if there is any erosion in value of the security and if the realisable value thereof is less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be, such an asset should straightaway be classified as a doubtful asset from Standard category.

94 LOSS ASSET: A loss asset is one where,
loss has been identified by the Bank or internal or external auditors or the RBI inspectors but the amount has not yet been written off wholly. Classification as a Loss asset is not linked to the age of NPA, but linked to the realisable value of the security and also the chances of recovery of full amount. A loss asset is one where, loss has been identified by the bank or internal or external auditors or the RBI Inspectors but the amount has not been written off wholly. Classification as a Loss Asset is not linked to the age of NPA, but linked to the realisable value of the security and also the chances of recovery.

95 Loss Asset contd….. If there is any erosion in value of the security and if the realisable value of such security, as assessed by the Branch/ approved valuers/RBI auditors is less than 10% of the outstandings in the borrowal account, the asset should straight away be classified as a Loss Asset. A standard or sub-standard asset can directly be identified as a loss asset in cases of serious credit impairment, such as erosion in realisable value of the security below 10% of the outstandings.

More than 50% erosion in value of security STANDARD STANDARD Realisable value of security <10% of outstandings S M A As per norms for different segments SUB-STANDARD Ex: SUB-STANDARD EX: LOSS ASSET DOUBTFUL- DA-1 DOUBTFUL- DA After 12 months DOUBTFUL- DA-2 After 12 months Realisable value of security <10% of outstandings DOUBTFUL- DA-3 After 24 months

97 Short Duration Crops: Paddy- Mono Crop (contd..)
Remains unpaid Commencement of season Due date Not Paid NPA 2 seasons of 12 months each June 2005 ILLUSTRATION: -Crops grown : Paddy Short or Long Duration crop : Short duration ( upto 12 months) Duration in months as per SLBC :12 months (for mono cropped areas the crop duration is taken as 12 months ) -Since the account became overdue on it would become NPA if it remains overdue for 2 crop seasons of 12 months each ( = 24 months), i.e on In this case the crop grown is paddy, the crop duration of which, as per SLBC, is 6 months. Therefore, the account would become NPA if it remains overdue for 2 crop seasons of paddy, which would be equivalent to 12 months (6 months + 6 months). Since the amount had become overdue on , the account would become NPA on 30the November ( plus 12 months i.e. 2 crop seasons of paddy) SBIRD

98 SHORT DURATION CROP EXAMPLE-II: -Nature of facility : Paddy 6 months
OTHER THAN MONO CROPPED AREAS EXAMPLE-II: -Nature of facility : -Crops grown by farmer : -Duration as per SLBC : -Beginning of season : -Date of sanction/Disbursement : -Due date * : (*For ATL : Instalment amount & For KCC: Full amount availed for Paddy cultivation) KCC or ATL Paddy 6 months June every year

99 Short Duration Crops : Paddy- Double Crop
Remains unpaid Commencement of season Due for payment Not Paid NPA June 2005 2 seasons of 6 months each ILLUSTRATION: -Crops grown : Paddy Short or Long Duration crop : Short duration (<12 months Crop) Duration in months as per SLBC: 6 months ( suppose SLBC says so) -Since the account became overdue on it would become NPA if it remains overdue for 2 crop seasons of 6 months each ( 6+6 = 12 months), i.e on

100 NPA TERM LOANS * April 30 days + May 31 Days + June 30 Days = 91 days.
Instalment/ Interest due Remains overdue NOT PAID 91st Day NPA Overdue for > 90 days * * April 30 days + May 31 Days + June 30 Days = 91 days. Therefore, the account becomes NPA on i.e. on 91st day.

101 ASSET CLASSIFICATION An advance can be classified under only one category. All accounts of a borrower require to be classified under a single category. If arrears of interest and principal are paid by the borrower in the case of loan account classified as NPA, the account should no longer be treated as NPA and may straight away be classified as ‘standard’ account (provided the the asset does not suffer from any other credit weakness, such as suspension of activity, etc.) An advance can be classified under only one category. An account can either be classified only as a “Standard Asset” or as a “Sub-standard Asset” or as a “Doubtful Asset” or as a “Loss Asset”. It can not be classified in more than one category. All accounts of a borrower require to be classified under a single category. If one account becomes sub-standard, all other accounts, of this borrower, even if these accounts are regular, have to be classified under sub-standard category only. c) If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as ‘standard’ accounts, straight away. SBIRD

102 ASSET CLASSIFICATION Identification of NPA is to be done on the basis of position of the account as on the date of Balance Sheet, i.e. based on position of the account as on 31st March of every year. Age of NPA is reckoned from the date on which the a/c has slipped from Standard Category to NPA category and not from the date of sanction or date of irregularity. Date of sanction Due, but not paid ( A/c becomes irregular) Account becomes NPA d) Identification of NPA is to be done on the basis of the position of the account as on the date of balance sheet. That means to say that even if the account was irregular continuously for several months prior to 31st March and if the borrower repays entire overdue amount on 31st March, the account would become eligible to be classified as a “standard asset” as on 31st March of that year, provided the account does not suffer with any other credit weakness. e) The age of NPA is reckoned from the date on which the a/c slipped down from standard category as per IRAC norms and not from the date of irregularity or date of identification. For example if an account is irregular from and becomes sub-standard on , the age of NPA of this account would be counted from 15th October 2005 and not from In the above example age of the NPA will be reckoned from & not from or SBIRD


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