It is very likely that tightening the upgrade criteria could lead to an increase in the number of NPAs specifically for NBFCs, as banks have already followed suit. – NPA identification, in the case of interest payments, banks should only classify an account as NPA if the interest due and charged during a quarter is not fully paid within 90 days of the end of the quarter. The classification of assets in credit accounts where an individual loan or a few loans are recorded before the balance sheet date should be treated with caution and without leaving room for subjectivity. If, based on the available data, the account has an inherent weakness, it should be considered an NPA. In other real-life cases, banks must provide auditors/control officers with sufficient evidence of how the account is cleared in order to remove doubts about their ability to pay. For the bank or lender, interest on loans is a major source of income. As a result, non-performing assets have a negative impact on their ability to generate adequate returns and thus on their overall profitability. It is important for banks to keep track of their non-performing assets, as too many NPAs affect their liquidity and ability to grow. The revenue recording policy must be objective and based on the balance of collection. International income from non-performing assets (NPAs) is not recognised on an accrual basis, but is not recognised as revenue until it is actually received. Therefore, banks should not charge interest on NPAs and take it into the income account.
This also applies to state-guaranteed accounts. One. The classification of an asset as NPA should be based on the certificate of destruction. The bank should not classify an imprest account as an APN solely on the basis of certain temporary deficiencies, such as unavailability of adequate attractiveness based on the latest available inventory status, temporary exceeding of the arrears limit, non-submission of inventory statements and non-renewal of limits on the due date, etc. When classifying accounts with such deficiencies, banks may follow these guidelines: B. Banks should ensure that the use of working capital accounts is covered by working capital adequacy, as current assets are only used when needed. The tractive force shall be determined on the basis of the current inventory status. However, given the difficulties faced by large borrowers, the stock market statements on which banks rely to determine attractiveness should not be more than three months old.
The stock of the account, calculated on the basis of the force of attraction calculated from the statements of stocks more than three months old, would be considered irregular. Non-performing assets may be manageable, but it depends on their number and lag. In the short term, most banks can take control of a significant number of APNs. However, if the volume of NPAs continues to grow over a long period of time, it threatens the financial health and future success of the lender. These are non-performing assets with a prolonged default. With this class, banks are forced to accept that the loan will never be repaid and must declare a loss on their balance sheet. The total amount of the loan must be written off completely. Lenders can also convert bad debts into equity, which can go as far as the full repayment of the principal lost in the defaulting loan. When bonds are converted into new shares, the value of the original shares is usually eliminated.
As a last resort, banks can sell bad debts at high discounts to loan collection companies. Lenders typically sell defaulting loans that are not secured or when other collection methods are not considered profitable. Effective March 31, 2005, a substandard asset would be an asset that remained NPA for up to 12 months. Such an asset has well-defined credit weaknesses that threaten debt liquidation and is characterized by the obvious possibility that banks will incur losses if deficiencies are not corrected. RBI has issued a notice on regulatory standards for revenue recognition, asset classification and advance disclosure requirements (“RBI circulars”). The aforementioned RBI Circular dated 12 November 2021 is presented as a clarification by the RBI on the regulatory standards applicable to all credit institutions. However, this would have a significant impact on the classification of NPAs, particularly by banks and NBFCs. The RBI intends to clarify and harmonize certain aspects of the existing regulatory guidelines so that they are applicable mutatis mutandis to all credit institutions. The purpose of the RBI circular is to put NBFCs` classification standards on an equal footing with those of banks. However, some categories of NPNs are primarily not covered by certain aspects of the RAIC regulations or are subject to less stringent standards.