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ANDHRA PRAGATHI GRAMEENA BANK HEAD OFFICE::KADAPA

Cir No.76–2012-BC-CSRD Dt. 17.03.2012

INCOME RECOGNITION, ASSET CLASSIFICATION, PROVISIONING &

COMPILATION OF YEAR-END RETURNS ~~~

Branches are required to conduct the exercise of Asset Classification, Interest Reversal and Computation of Provision requirement for all borrowal accounts accordingly and compile the Year End Returns pertaining to advances as on 31-03-2012 for the purpose of audit and annual closing of accounts. Branches shall classify all loans and advances into Performing (Standard) and Non-Performing (Substandard, Doubtful and Loss) Assets in terms of IRAC Norms given therein and recommend provision at stipulated rates for all Non-Performing Assets. Branches shall strictly adhere to the IRAC Norms and ensure that no scope is given for divergence in asset classification, interest reversal and provisioning by Statutory Auditors and/or NABARD Inspectors. Branch officials shall discuss with the Statutory Auditors and convince them of the correctness of Asset Classification, Interest Reversal and Provision made by the branch. The responsibility of ensuring correct asset classification, interest reversal and provisioning is vested on the branch heads/concerned officials. Regional Offices are also required to ensure correct reporting NPA accounts, provisioning and interest reversal. The data furnished by the branches/offices is consolidated and presented in the Balance Sheet of the Bank. The consolidated data is also furnished to the Board of Directors, Statutory Central Auditors, Reserve Bank of India, Govt. of India etc. Therefore, branches shall ensure that the Returns/ Statements are complete, correct and consistent in all respects. As completion of Audit and preparation of Balance Sheet is a time-bound programme, branches shall conduct year end work pertaining to advances in a planned and systematic manner and ensure that the work is completed as per schedule. Branches are aware that additional NPA necessitates higher provision and interest reversal, which affects Bank‟s profitability adversely. Branches shall identify NPAs and potential NPAs/ Special Monitoring Accounts, and take steps for up gradation/ regularization/ recovery on a continuous basis. ROs and branches shall put in place a constant monitoring system and take effective measures at the first sign of irregularity to prevent the assets from slipping to NPA status. All efforts shall be made to avoid slippage of advances from Standard to NPA category and to recover/ upgrade the existing as well as fresh NPAs.

Clarifications required, if any, on this circular may be sought from Chairman‟s Secretariat & Recoveries Department at Head Office.

(S.P.KULKARNI) GENERAL MANAGER

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INDEX

Chapter No.

Para No.

Particulars Page No

1 Introduction 5

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2 Asset Classification & Income Recognition 6

2.1 Asset Classification – Delinquency Norms 6

2.1.1 Definition of a Non Performing Asset 6

2.1.2 Long & Short Duration Crops 6

2.1.3 Direct agricultural advances – Applicability of agricultural norms

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2.1.4 Out of order 6

2.1.5 Overdue 7

2.1.6 Asset classification in case of non-payment of monthly interest 7

2.2 Asset classification in case of temporary deficiencies 7

2.2.1 Non-submission of stock statements 7

2.2.2 Non-Renewal/Review of Credit Limits 7

2.3 Advances which need not be classified as NPA 8

2.3.1 Advances against Term Deposits, NSCs, KVP/ IVP etc 8

2.3.2 Central Govt. Guaranteed Advances 8

2.4 Explanation with examples 8

2.4.1 2.4.1 Loans (loans repayable in instalments) 8

2.4.2 Special Cases 9

2.4.3 Overdraft/ Cash Credit 9

2.4.4 Bills Purchased/ Discounted 10

2.4.5 Application of norms on Syndicate Kisan Credit Card (SKCC) 10

2.4.6 Other Accounts 11

2.4.7.1 Jewel Loans 11

2.4.7.2 Educational Loans 11

2.4.8 Staff Housing /Vehicle loans 11

2.4.9 Advance Payments 11 2.5 General guidelines 11

2.5.1 Accounts where there is erosion in value of security/frauds committed by borrowers

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2.5.2 Asset classification to be borrower-wise and not facility-wise 12

2.5.3 Advances to FSS 13

2.5.4 Areas affected by natural calamities 13

2.5.5 Borrowers dealing with more than one branch 13

2.5.6 Asset classification of suit filed / DICGC accounts 13

2.6 Sub-classification of Performing assets 13

2.7 Sub-classification of Non-performing assets 14

2.7.1 Date of NPA 14

2.7.2 Sub-classification of NPAs based on Date of NPA / Age of NPA 14

2.7.2.1 Sub-standard assets 14

2.7.2.2 Doubtful assets 14

2.7.2.3 Loss assets 15

2.7.3 Accounts where asset classification has been changed by Auditors/ NABARD Inspectors/ Head Office

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Chapter No.

Para No.

Particulars Page No

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3 Agriculture Debt Waiver & Relief Scheme 2008 - Prudential Norms on IRAC

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3 A Norms applicable to the accounts subjected to Debt waiver 16

3 B Norms for the accounts subjected to Debt relief 17

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4. Restructuring/Rescheduling of Advances 18 4.1 General Guidelines 18

4.2 Asset Classification Norms for Restructured Advances 18

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5 Income Recognition 21

5.1 Recognition of Interest Income 21

5.2 Recognition of fees/Commission/income 21

5.3 Appropriation of Recovery in NPAs 21

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6 Provision 22

6.1 Provision – Impact on profitability 22

6.2 Provision for Standard Assets 22

6.3 Provision for NPA 22

6.4 Notes 23

6.5 Provision for NPAs where OTS is sanctioned 23

6.6 Provisioning requirement in case of DICGC A/cs 23

6.6.1 DICGC Claim Received accounts 23

6.7 Valuation of Land & Building, Plant & Machinery, Vehicles etc. 25

6.7.1 Valuation of Hypothecated Securities 25

6.7.2 Verification of Securities 25

6.7.3 Treatment of security for the purpose of provisioning 25

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7 Up gradation of Loan Accounts Classified as NPA 27

7.1 Up gradation by payment of arrears 27

7.2 Up gradation by other means 27

7.3 Up gradation of multiple accounts 27

7.4 Up gradation of Restructured Sub-standard or Doubtful accounts 27

7.5 Accounts Regularized near about the balance sheet date 28

7.6 Regularization of accounts for up gradation 28

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8 Accounting Procedure – Non-performing assets 29

8.1 Income Recognition 29

8.2 Interest reversal 29

8.2.1 Non-performing loans, Non-operative NPOD and other Nonperforming accounts

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8.2.2 Operative NPOD accounts 29

8.2.3 Bills 30

8.2.4 Advances guaranteed by Central Govt. 31

8.3 Expenses incurred in suit filed accounts 31

8.4 Transfer of PAs to NPAs 31

8.5 Unrealized Interest in NPAs and Shadow Accounts 31

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9 Submission of Returns 33

9.1 Return-I 33

9.2 Return-II 33

9.3 Return-III 33

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9.4 Return-IV 33

9.5 Preparation of Returns 33

9.6 Submission Returns 34

9.7 Supply of printed Annual Returns 34

Annexure No.

Title Page No.

1. Agricultural Advances to which prudential norms are applicable 35

2. Minimum Balance Method for Interest Reversal and Asset Classification

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3. NPA Flash Report 39 4. NPA Tracking – Important Steps to be observed 40

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1. INTRODUCTION

1.1. The profitability and long term viability of the Bank depend mainly on quality of its loans and advances. 1.2. In line with the international practices and as per the recommendations made by the Committee on the Financial System (Narasimham Committee), the Reserve Bank of India 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. 1.3. The prudential norms for income recognition, asset classification and provisioning are based on the principle that, income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria, which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realizable value thereof. 1.4. Under prudential norms, all loans and advances shall be classified into performing and non-performing assets based on objective facts, income recognition in case of all non-performing assets shall be under cash recovery method and provision shall be made for all non-performing assets (NPA), at prescribed rates. Provision shall also be made for performing assets at stipulated rates. Reserve Bank of India/NABARD has revised the prudential norms from time to time and made asset classification norms more stringent and rates of provision higher for non-performing assets. 1.5. The prudential norms enable the Banks to measure the quality of loans and advances based on objective facts, improve the asset quality, recognize income on loans and advances based on record of recovery and make provisions for potential future losses arising out of bad debts. 1.6. Implementation of prudential norms has twin impact on profitability of the bank. Interest on non-performing assets is recognized on cash basis and unrecovered portion of interest pertaining to current year and past periods are reversed thereby current year income is reduced. Moreover provision is made for all performing and non-performing assets by debiting P & L account; thereby current year expenditure is increased. It implies that branches and administrative offices shall put in place systems for measuring the asset quality through classification of assets as per prudential norms on a continuous basis and initiating measures for sustaining/ improving the quality of assets through regular monitoring and timely recovery measures.

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2. ASSET CLASSIFICATION & INCOME RECOGNITION 2.1. Asset Classification – Delinquency Norms: Branches shall classify all borrowal accounts into Performing (Standard) assets and Nonperforming (Sub-standard, Doubtful & Loss) assets as per delinquency norms and other parameters. The availability of security or net worth of the borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on the record of recovery. 2.1.1. Definition of a non performing Asset: A non performing asset (NPA) is a loan or an advance where: i) Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii)The account remains „out of order‟ for 90 days in respect of an Overdraft/Cash Credit (OD/CC), iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv) A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. v) A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. vi) Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. vii) Interest charged during any quarter is not recovered fully within 90 days from the end of the quarter. viii) In respect of a derivative transaction, the overdue receivables representing positive mark to- market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 2.1.2. For the purpose of the above norms, “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. The crop season for each crop, i.e., the period up to harvesting of the crops raised, would be as determined by the State Level Bankers‟ Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him. 2.1.3. The norms 2.1.1. (iv & v) are applicable to all direct agricultural advances listed in Annexure –1. In respect of agricultural loans other than those specified in Annexure – 1 (i.e. loans for allied activities viz. Dairy, Poultry, Sericulture, Animal Husbandry etc.) and term loans given to non-agriculturists, identification of NPAs shall be done on the same basis as non-agricultural advances i.e. 90 day delinquency norm. 2.1.4. ‘Out of Order’ (a) An OD/CC account shall be treated as „out of order‟ if the outstanding balance remains Continuously in excess of the sanctioned limit or drawing power, whichever is less. If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a

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separate account, the balance outstanding in that account should also be treated as part of the borrower‟s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. In other words, balances in BG/ LC/ DPG Paid accounts, if any, shall be notionally added to the balance in OD/ CC/ Current account, and the sum of these shall be compared with the sanctioned limit/ drawing power, whichever is less, to ascertain whether the account was out of order or not on that day. (b)In cases where the outstanding balance in the principal operating account is less than the sanctioned limit or drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as „out of order‟. 2.1.5. Overdue’: Any amount due to the Bank under any credit facility is „overdue‟ if it is not paid on the due date fixed by the Bank. 2.1.6. Branches shall recover monthly interest on the due dates, i.e. last day of the month. However, for the purpose of asset classification, interest debited at the end of a month, other than quarter ending month, shall be deemed as overdue on the last day of the quarter only. In other words if interest debited to an account at the end of January, February, April, May, July, August, October or November is not paid, the same shall be deemed as overdue from the end of the quarter, for the purpose of asset classification, and the account shall be classified as NPA if the interest is not paid within 90 days from the end of the quarter. 2.2. Asset classification in case of accounts with temporary deficiencies: Branches shall not classify an advance as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, nonsubmission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies, branches may follow the guidelines given below. 2.2.1. Non-submission of stock statements: Branches should ensure that drawings in the working capital accounts (OD/ CC) are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at, based on the stock statement that is current. The outstanding in an 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. 2.2.2. Non-Renewal/ Review of Credit Limits: Regular and adhoc credit limits need to be reviewed/ renewed 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

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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 (not 90 days) from the due date/ date of ad hoc sanction shall be treated as NPA. 2.3. Advances, which need not be classified as NPA 2.3.1.Advances against Term Deposits, NSCs, KVP/IVP etc: Advances against term deposits inclusive of accrued interest, if any, NSCs eligible for surrender, Indira Vikas Patras, Kisan Vikas Patras and SV of Life Insurance policies shall not be treated as NPAs, provided adequate margin is available in the accounts. Such securities are exempt from provision requirement to the extent so covered by such securities and hence, they shall be classified as standard assets only. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. 2.3.2. Central Government Guaranteed Advances: (a) The credit facilities backed by guarantee of Central Govt. though overdue shall be treated as NPAs, only when the Govt. repudiates its guarantee when invoked. This exemption from classification is not for the purpose of Income Recognition. Hence, credit facilities backed by Central Govt. guarantee, with overdues for more than 90 days, shall be treated as standard asset till the guarantee is invoked and repudiated. However, the unrecovered portion of interest, if any, debited during the current year and past periods shall be reversed and income shall be recognized on cash basis only. (b) If Central Government guarantee is not adequate to cover the full liability, asset classification and provisioning norms applicable to advances shall be applied on uncovered portion. Note: The credit facilities guaranteed by State Govts. Would attract asset classification and provisioning norms if interest and/ or instalments of principal remain overdue for a period of more than 90 days. In other words, guarantee of State Governments shall not be taken into account for asset classification and provisioning. 2.4. Explanation with examples: 2.4.1. Loans (loans repayable in instalments):

A loan repayable in instalments becomes NPA when interest and/or instalment of principal remain overdue for a period of more than 90 days. Therefore, 91st day from the due date of earliest unpaid interest or instalment of principal is the date of NPA. Illustrations: i)If interest due for the month ended 30th September is not paid, it becomes NPA on 29th December. ii) If interest due for the month ended 31st October is not paid, it becomes NPA on 31st March. iii) If installment towards principal due on 15th October is not paid, it becomes NPA on 13th January.

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2.4.2. Special Cases:

i) Loans repayable in Equated Monthly Instalments: In the case of loans repayable in equated monthly instalments, where a part of the interest is included in the instalment, NPA status shall be determined on the basis of non-payment of equated monthly instalments and not with reference to the date of debit of monthly interest. ii) Loans with moratorium for payment of interest: In the case of loans given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes due only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue with reference to date of debit of interest. They become overdue after due date for payment of interest, if uncollected. iii) Staff Housing & Vehicle Loans: In the case of housing loan, vehicle loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first month onwards. Such loans/ advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates. 2.4.3. Overdraft/ Cash Credit:

2.4.3.1. An Overdraft/ Cash credit account shall be treated as NPA, if it remains „out of order‟ for 90 days. Balance in LC/BG/DPG paid account, if any, shall be added notionally to OD/CC/Current account and the sum shall be compared with sanctioned limit/ drawing power, whichever is less, to determine whether the balance outstanding was in excess of sanctioned limit/ drawing power. Eg: (1) If liability under overdraft/ cash credit (after notionally adding devolved liability under LC/BG/ DPG paid account) remains continuously in excess of sanctioned limit or drawing power, whichever is less, on all days during the period 1st November to 29th January, it becomes NPA on 29th January (i.e. continuously overdrawn for 90 days). Eg: (2) If Current account (after notionally debiting devolved liability under LC/BG/ DPG paid account) is continuously in debit balance on all days during the period 1st November to 29th January, it becomes NPA on 29th January (i.e. continuously overdrawn for 90 days) 2.4.3.2. In cases where the outstanding balance in the principal operating account i.e., OD/CC account is less than the sanctioned limit or drawing power, whichever is less, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as „out of order‟ from the beginning. In other words the account shall be treated as out of order for 90 days as on 31st March and hence, it slips to NPA on the date of Balance Sheet i.e., 31st March. Eg: (1) If an overdraft/ cash credit account is within limit and drawing power but there are no credits continuously (from 2nd January to 31st March in the case of leap years and 1st January to 31st March in the case of other years ), the account becomes NPA on 31st March (i.e., no credits continuously for 90 days).

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Eg: (2) If an overdraft/ cash credit account is within limit and drawing power but the credits received are less than the interest debited during the period (from 2nd January to 31st March in case of leap years and 1st January to 31st March in the case of other years i.e., interest debited during the period is not covered by credits received during the period) the account becomes NPA on 31st March. 2.4.3.3. The outstanding in an account based on drawing power calculated from stock statements older than three months would be deemed as irregular. An OD/ CC account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days. Eg: Drawals permitted during November against drawing power based on stock statement as on 31st July or before are irregular. Drawals permitted during December against drawing power based on stock statement as on 31st August or before are irregular. If such irregular drawals are permitted in an account continuously for 90 days, the account becomes NPA on 90th day. In the above case, if drawals are permitted during November based on stock statement as on 31st July or before, during December based on stock statement as on 31st August or before and during January based on stock statement as on 30th September or before, the account will slip to NPA on 29th January, 28th February and 31st March (non-leap year)` respectively. 2.4.3.4. An account where the regular/ad hoc credit limits have not been reviewed/ renewed within 180 days (not 90 days) from the due date/ date of ad hoc sanction shall be treated as NPA. Eg: (1) If a regular OD limit, the validity of which has expired on 31st July, is not renewed or reviewed up to 26th January, it will slip to NPA on 26th January. Eg: (2) If adhoc sanction given on 31st July is not renewed or reviewed up to 26th January, it will slip to NPA on 26th January. 2.4.4. Bills Purchased/Discounted: A bill purchased/ discounted shall be treated as NPA, if it remains overdue for a period of more than 90 days. Eg: (1) A cheque/draft discounted (CDD) on 25th October becomes due for payment (i.e. expected to be realised within 7 days) on 31st October. It becomes NPA on 29th January (i.e. more than 90 days from due date), if it remains unpaid. Eg: (2) An usance bill falling due for payment on 31st October as per tenor of the bill, becomes NPA on 29th January (i.e. more than 90 days from the due date), if it remains unpaid. 2.4.5. Application of norms on Pragathi Kisan Credit Card (PKCC): PKCC facility being in the nature of advance for agricultural purposes, the prudential norms as applicable to Agricultural Advances would apply to the PKCC accounts.

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2.4.6. Other Accounts:

Any other credit facility shall be treated as NPA, if any amount to be received remains overdue for a period of more than 90 days. Note: The type of accounts which fall under “other accounts” are debit balance in SB/CA, JL where instalment is not stipulated,etc. (JL where instalment is fixed, should be treated as loan and not as “other accounts”) 2.4.7.1. Jewel Loans: jewel loans sanctioned for agriculture purpose are repayable along with interest before one year and if they are not repaid within 2 years (two crop seasons)from the due date, such loans shall be classified as NPAs. Similarly, jewel loans under General category are repayable before 2 years and if they are not repaid within 90 days from the due date, such loans shall be classified as NPAs. 2.4.7.2. Education Loans: As per the scheme guidelines prescribed by the Government of India, the repayment is to be made in 5-7 years after the completion of course period + one year or six months after getting the job whichever is earlier. Interest is also payable along with the instalment.

Hence the Education loans shall be treated as NPAs if the same is overdue for more than 90 days from the due date as explained above.

2.4.8. Staff Housing/Vehicle Loans: In the case of housing /vehicle loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first month onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of installment of principal or payment of interest on the respective due dates.

2.4.9. Advance Payments: Where the borrower has made advance payment of instalments fixed towards the loan and as on 31.03.2012 the loan account is regular such loan account need not be treated as NPA even if technically interest is due for more than 90 days. 2.5. General Guidelines: 2.5.1. Accounts where there is erosion in the value of security/frauds committed by borrowers: i) In respect of accounts where there are potential threats to recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers, it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate. ii) Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 per cent of the value assessed by the Bank/approved valuers/ RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under Doubtful category and provisioning should be made as applicable to doubtful assets.

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iii) If the realizable value of the security, as assessed by the Bank/ approved valuers/ RBI, is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset.

2.5.2. Asset Classification to be borrower-wise and not facility-wise:

i) It is difficult to envisage a situation where only one facility to a borrower becomes a problem credit and not the others. Therefore, all the facilities granted by the Bank to a borrower will have to be treated as NPA and not the particular facility or part thereof which has become irregular. Eg: If one facility of a borrower is “Standard asset”, the second is “Substandard asset” and the third is “Doubtful asset above three years”, then all the facilities and investments shall be classified as “Doubtful asset above three years”. However, if one account of a borrower is “Doubtful above three years” and the second account is “Loss asset” then both the accounts shall be classified as “Doubtful above three years”. ii) If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower‟s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. iii) The bills discounted under LC favouring a borrower may not be classified as a Nonperforming advance (NPA), when any other facility granted to the borrower is classified as NPA. However, in case documents under LC are not accepted on presentation or if the payment under LC is not made on the due date by the LC issuing bank or any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA. iv) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the overdues arising from forward contracts and plain vanilla swaps and options become NPAs, all other funded facilities granted to the client shall also be classified as nonperforming asset following the principle of borrower-wise classification as per the existing asset classification norms. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallized or might crystallize in future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty.

This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself, be classified as NPA, as per the extant IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft facility from the bank, the receivables mentioned at item (iv) above may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit / overdraft facility account. The principle of borrower-wise asset classification would be applicable here also, as per extant norms.

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vi) In cases where the contract provides for settlement of the current mark-to-market value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as a non-performing asset after an overdue period of 90 days. vii) As the overdue receivables mentioned above would represent unrealized income already booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken to „Profit and Loss a/c‟ should be reversed. 2.5.3. Advances to FSCS: In respect of agricultural advances as well as advances for other purposes granted by bank to Farmers Service Cooperative Societies (FSCS) under the onlending system, only that particular credit facility granted to a FSCS which is in default, for a period of two crop seasons in case of short duration crops and one crop season in case of long duration crops, as the case may be, after it has become due, shall be classified as NPA and not all the credit facilities sanctioned to FSCS. However, other direct loans and advances if any, granted by the Bank to the member borrower of FSCS outside the on lending arrangement, will become NPA even if one of the credit facilities granted to the same borrower becomes NPA. 2.5.4. Areas affected by Natural Calamities: Where natural calamities impair the repaying capacity of agricultural borrowers Banks may decide relief measures like conversion of short term production loan into term loan or reschedulement of the repayment period; and sanctioning of fresh short term loan. In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be as NPA if interest and/or instalment of principal remain overdue for two crop seasons for short duration crops and for one crop season for long duration crops. 2.5.5. Borrowers dealing with more than one branch: If a borrower is enjoying credit facilities in more than one branch, the branch where the main accounts are maintained shall determine the asset classification after collecting required information about the conduct of the account at other branches and communicate the asset classification and allocation of securities to the other branches. The other branches shall classify the account accordingly. 2.5.6. Asset classification of suit filed/ DICGC Claims Lodged accounts: Normally there cannot be any standard asset under suit filed and DICGC claim lodged accounts. Hence, the entire suit-filed accounts and DICGC claim lodged accounts shall be treated as NPA and shall be further classified into Sub-standard or Doubtful or Loss assets. For determining the date of NPA under these accounts, the conduct of the accounts prior to date of filing of suit/claim shall be taken into account. 2.6. Sub-classification of Performing (Standard) Assets: Performing (Standard) assets shall be classified as i) Current Dues: Standard Assets without overdues ii) Overdues:

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(a)Standard Assets with overdues up to 30 days (b) Standard Assets with overdues for more than 30 days up to 90 days (Special Monitoring Accounts) iii)Advances guaranteed by Central Govt. with overdues more than 90 days. 2.7. Sub-Classification of Non-Performing Assets: Non-performing assets shall be classified as Sub-standard/Doubtful/Loss assets based on date of NPA/ other parameters. 2.7.1. Date of NPA:

i) A Borrowal account can become NPA on any day/ date during the year based on delinquency norm/ other parameters. Date of NPA is the 91st day from the due date of earliest interest and/ or instalment of principal remained unpaid in case of loans, bills etc and 90th day the account is out of order in case of OD/CC etc. ii) Date of NPA shall not be revised on part payment of arrears of interest and/ or instalments. Hence, in the case of Existing NPAs there is no need to determine date of NPA afresh. 2.7.2. Sub-Classification of NPA based on Date of NPA: 2.7.2.1. Sub-Standard Assets: i)A Sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months. ii) Sub-standard assets shall be further segregated into „Secured Exposure‟ and „Unsecured Exposure‟ for the purpose of determining the rate of provision. „Unsecured exposure‟ is defined as an exposure where the realizable value of the security, as assessed by the Bank/approved valuers/ Reserve Bank‟s inspecting officers, is not more than 10 percent, ab initio, of the outstanding exposure. „Exposure‟ shall include all funded and non-funded exposures (including underwriting and similar commitments). „Security‟ means tangible security properly charged to the Bank and will not include intangible securities like guarantees (including State Government guarantees), comfort letters etc. Rights, Licences, authorizations etc. taken as collateral security in respect of projects financed by the Bank shall not be reckoned as tangible security. 2.7.2.2. Doubtful Assets i) A Doubtful asset is one, which has remained in the sub-standard category for a period of 12 months. ii)Doubtful assets shall be classified into Doubtful assets less than one year (DA-1), between 1 and 3 years (DA-2) and above 3 years (DA-3).

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iii) Further, each Doubtful asset shall be bifurcated into secured portion and unsecured portion for provisioning purpose. 2.7.2.3. Loss Assets:

A Loss asset is one where loss has been identified by the Bank or internal or external auditors or RBI inspectors. Such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. An asset may become uncollectible due to serious credit impairment, frauds, non-availability of security, erosion in value of security etc. Note: An unsecured/ clean loan, which has slipped to NPA, need not be classified as loss asset merely because it is unsecured. Such accounts may be classified as sub-standard asset with 25% provision for one year and Doubtful asset with 100% provision after completion of one year as NPA.

2.7.3. Accounts where asset classification has been changed by Auditors/NABARD Inspectors/HO:

Where Asset classification assigned by the branch was changed by Statutory Auditors or RBI/NABARD Inspectors or Head Office and the changed asset classification was communicated to the branch, the branch shall assign the changed asset classification, unless the account has been upgraded as standard asset or the asset classification as per the branch is lower than the changed asset classification communicated by Head Office.

Eg: (i) Assume that (a)Branch had treated an account as Standard asset as on 31st March of the previous year. (b)The asset classification is changed to Sub-standard Asset by Statutory Auditors or RBI/NABARD Inspectors or Head Office and provision is made accordingly. (c) The asset classification as per branch as on 31st March of current year is Standard. In this case branch shall recommend/assign asset classification as Doubtful-1 and recommend provision accordingly, unless the irregularity observed by the Auditor or RBI Inspector is fully rectified and the account is regular in all respects.

Eg: ii) Assume that (a)Branch had treated an account as Sub-standard asset as on 31st March of the previous year. (b) The asset classification is changed to DA-2 by Statutory Auditors or RBI Inspectors or Head Office (may be due to deterioration/ erosion in value of security) and provision made accordingly. The asset classification as per branch as on 31st March of current year is DA-1. In this case branch shall recommend/ assign asset classification as DA-2 and recommend provision accordingly. However, if the asset classification as per branch as on 31st March of current year is DA-3 which is lower than the asset classification assigned by Statutory Auditors/ RBI /NABARD /HO, then branch shall recommend/assign asset classification as DA-3 and recommend increasedprovision accordingly.

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3. Agricultural Debt Waiver & Relief Scheme 2008 – Prudential Norms on Income Recognition, Asset Classification and Provisioning:

In terms of Reserve Bank of India/Government of India guidelines, our Bank has implemented the Agricultural Debt Waiver & Relief Scheme 2008.

The entire eligible amount has been credited to the loan account in the case of small or marginal farmers as per Debt Waiver Scheme. In the case of other farmers a rebate of 25% of the eligible amount will be given provided the farmer pays the balance 75% of the amount on the due dates specified in the Debt Relief Scheme. In addition the farmer has to submit an undertaking letter agreeing to pay his share.

Reserve Bank of India vide their circular RBI No.2008-09/106 DBOD.No.BP.BC.26/21-04-048/2008-09 dt.30.07.2008 has issued guidelines pertaining to Income Recognition, Asset Classification and Provisioning applicable to the loans covered under the captioned scheme.

A. Norms applicable to the accounts subjected to Debt Waiver:

Asset Classification:

The accounts eligible under debt waiver scheme as on 31.12.2007 might either a performing or non performing asset. Following guidelines shall be adhered to, while classifying the accounts after crediting the waiver amount.

(a) Performing accounts as on 31.12.2007: After crediting the amount of Debt Waiver to the performing assets, some of the accounts may still be outstanding in the books of the branch which are regular as on 31.12.2007. Subsequent asset classification after 01.01.2008 shall be as per existing IRAC norms.

(b) (i) Non Performing accounts as on 31.12.2007: After crediting the eligible debt waiver amount, some accounts might be continuing in the books of the branches as upgraded accounts as at 31.12.2007. Such up graded accounts shall be governed by existing IRAC norms.

(ii) Non Performing Accounts wrongly identified/claimed under debt waiver scheme: In case the claim of a farmer is found to be ineligible and specifically rejected at a later stage, the asset classification of the wrongly identified NPA account should be determined with reference to the original date of NPA and suitable provision shall be made as per extant guidelines.

(c) Fresh Finance: Fresh advances granted to debt waiver beneficiaries shall be treated as performing asset. Subsequent classification shall be done as per extant IRAC guidelines.

B. Norms for the accounts subjected to Debt Relief:

Under the scheme, the farmer is given a rebate of 25% by the Govt., provided he pays

the balance of 75% of eligible amount which is to be paid in three instalments. The Govt. has extended the date of repayment of 1st instalment by the „other farmers‟ under Debt relief Scheme from 30.09.2008 to 31.03.2009. Later the farmers were permitted to pay the entire share of eligible amount in one single instalment by 30.06.2009 which was subsequently extended to another six months, i.e., upto 31.12.2009. The cut-off date was extended further upto 30.06.2010.

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For recovery of loan accounts remained unpaid upto 30.06.2010, the Bank has introduced OTS-Debt Relief Scheme allowing relief upto 50% on merits of each case if the borrower repays their share of eligible amount on or before 31.03.2011. If such loans are not recovered on or before 31.03.2011, the same shall be classified as NPAs and necessary provisions shall be made.

Further, a Special One Time Settlement Scheme for Debt Relief Farmers (SOTS-DRF) was introduced by the Bank for settling the loans availed by „Other farmers‟ vide cir.No.201-2011-BC-CSRD dt.03.08.2011 and the cut-off date for implementation of the said scheme is 31.03.2012. If loans are not settled by 31.03.2012, such loans shall be classified as per extant IRAC norms by making necessary provisions.

At times, borrowers may find it difficult to service the debt obligation as per sanctioned terms on account of certain changes that alter the cash flow estimated at the time of appraisal of the advance.

Restructuring involves several components like re-scheduling, reduction in rate of interest, granting fresh finance, converting short term credit facility to long term loan, carving out of irregular portion of working capital limits into WCTL, converting un serviced interest into FITL, converting part/full debt into equity, waiver of penal interest/liquidated damages, right to recompense etc. Rescheduling the repayment period in cases like housing loans is one of the methods of restructuring. Any viable unit can be restructured. Restructuring is a credit decision. Detailed operational guidelines on restructuring are issued by HO: Credit vide circular No.50-2009-BC-CD dt.12.03.2009; Cir. 51-2010-BC-CD dt.05.03.2010; Cir.10-2011-BC–CD dt.14.01.2011; Cir.33-2011-BC-CD dt.10.02.2011.

Branches shall follow the extant guidelines while extending relief measures to the borrowers who are affected by the natural calamities and also in rescheduling of loans.

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4. Restructuring/Rescheduling of Advances:

At times, borrowers may find it difficult to service the debt obligation as per sanctioned terms on account of certain changes that alter the cash flow estimated at the time of appraisal of the advance.

Restructuring involves several components like re-scheduling, reduction in rate of interest, granting fresh finance, converting short term credit facility to long term loan, carving out of irregular portion of working capital limits into WCTL, converting un serviced interest into FITL, converting part/full debt into equity, waiver of penal interest/liquidated damages, right to recompense etc. Rescheduling the repayment period in cases like housing loans is one of the methods of restructuring. Any viable unit can be restructured. Restructuring is a credit decision. Detailed operational guidelines on restructuring are issued by HO: Credit vide circular No.50-2009-BC-CD dt.12.03.2009; Cir. 51-2010-BC-CD dt.05.03.2010; Cir.10-2011-BC–CD dt.14.01.2011; Cir.33-2011-BC-CD dt.10.02.2011.

Branches shall follow the extant guidelines while extending relief measures to the borrowers who are affected by the natural calamities and also in rescheduling of loans. 4.1 General Guidelines 4.01.1. Loans and advances extended by the Bank may become irregular due to genuine difficulties viz. Delay in implementation of the project, delay in commencement of commercial production, bottlenecks in production and/or distribution, natural calamities and other factors which are beyond the control of the borrowers. In such genuine cases, the borrowers may be assisted to overcome the difficulties by restructuring the credit facilities or rescheduling/rephrasing terms of repayment with or without interest concession. 4.01.2. Restructuring of credit facilities normally involve conversion of short-term loans into term loans, conversion of working capital finance into term loans, waiver/funding of overdue interest etc. Rescheduling/rephrasing normally involve increase in moratorium period, increase in repayment period, postponement of instalments, revision of amount of instalments etc. 4.01.3. Restructuring/rescheduling/rephrasing in all cases should be based on viability, rehabilitation potential and cash flows of the borrower. The restructuring/rephasement of loans/term loans and other credit facilities may be considered by the respective sanctioning authorities on merits. The sanctioning authority may exercise his discretion in rescheduling/restructuring of advances after assessing the need for restructuring, repayment capacity of the borrower, delay in implementation/commercial production of the project, other factors beyond the capacity of the borrower, etc.

Branches shall not resort to restructuring/rescheduling/rephasing for the purpose of avoiding slippage to NPA. 4.02. Asset classification of restructured/rescheduled/rephrased advances:

RBI has stipulated different norms for asset classification of restructured / rephrased / rescheduled agricultural and other loans and advances. Branches shall strictly adhere to

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these norms, furnished below, for asset classification of restructured/rescheduled/Rephased loans and advances. i). Asset Classification of Sub-standard asset after specified period:

The substandard asset, which has been subjected to restructuring/rescheduling, would be eligible to be upgraded to standard asset after the specified period, subject to restructuring/rescheduling, would be eligible to be upgraded to standard asset after the specified period, subject to satisfactory performance during the period. If satisfactory performance is not evidenced during the period, the asset classification of the restructured sub-standard asset would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

ii) Restructuring of credit facilities extended to traders:

As trading involved only buying and selling of commodities, and the problems associated with the manufacturing units such as bottleneck in commercial production, time and cost escalation etc., are not applicable to them, the rescheduling/rephasement shall be discouraged. iii). Relevant date of asset classification after restructuring:

Branches shall not restructure/reschedule borrowal accounts with retrospective effect. The asset classification, status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring/rescheduling/renegotiation. iv). Repeated Restructuring: Branches shall not restructure/reschedule accounts repeatedly unless there are very strong and valid reasons that warrant such repeated restructuring/rescheduling. v). Request for Restructuring:

Normally restructuring cannot take place unless alteration/changes in the original loan agreement are made with the formal consent/application of the borrower. However, the process of restructuring can be initiated by the branch in deserving cases subject to customer agreeing to the terms and conditions.

vi). Security: While assessing the extent of security cover available to the restructured/rescheduled credit facilities, collateral securities would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in intangible form like guarantee etc., of the promoter/others. vii). Funded Interest Income Recognition in respect of the NPAs, regardless of whether these are or are not subjected to rescheduling/restructuring, should be done strictly on cash basis, only on realization and not if the amount of overdue interest has been funded. If, however, the

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amount of funded interest is recognized as income, a provision for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognized, as income, should be fully provided for. viii). Reversal of Provision: Provision made for NPAs shall be reversed when the account becomes a standard asset. However, the provision made towards interest sacrifice, can be reversed only on satisfactory completion of all repayment obligations and the outstanding in the account is fully repaid. Branches shall not re-compute the extent of sacrifice each year and make adjustments in the provisions made towards interest sacrifice.

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5. INCOME RECOGNITION:

5.1. Income from non-performing assets (NPA) should not be recognized on accrual basis but shall be booked as income only when it is actually received. Therefore, once an account is transferred from PA to NPA, interest shall not be debited to the account at monthly intervals or on due dates. Similarly, fees, commission and similar income shall not be debited on accrual basis. As and when credits are received, fees/ commission/ interest/ other income due in the account or actual amount received, whichever is less, shall be debited to the a/c and credited to Misc. Income/Interest on NPA. 5.2. The unrecovered portion of fees/ commission/ interest/ other income debited, during the current year and past periods, in fresh NPA accounts shall be reversed at the end of the quarter in which the account is transferred from PA to NPA. This will apply to Government Guaranteed accounts also. The unrecovered portion of interest in Fresh NPAs, to be reversed, shall be ascertained by „Minimum Balance Method‟ explained and illustrated in Annexure – 2. 5.3. Appropriation of Recovery in NPAs: Repayment received in NPAs shall be appropriated to Expenses, Interest and Principal in that order. However, where One Time Settlement has been sanctioned, the repayment received shall be appropriated first towards the Principal (OTS amount), then to Expenses and remaining to Interest.

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6. PROVISION

6.1. In conformity with the prudential norms, provisions shall be made for all non-performing assets based on asset classification, period for which it remained non-performing, availability of security and realizable value thereof. Provision for NPAs strengthens Bank‟s balance sheet as it acts as a cushion against potential future loss arising out of write-off of bad debts. However, provisioning affects profitability of the Bank, as provision is made out of current year income. Provision also has an opportunity cost since it reduces profit and consequently Tier I capital of the Bank. Additional capital would have enabled the Bank to increase the credit and consequently increase the profit. 6.2. Provision for Standard Asset: Provision is also required to be made for standard assets at stipulated rates, furnished below. Since provision for Standard assets is computed at Head Office, branches need not compute or recommend provision for Standard assets.

Category of Standard Asset Rate of Provisioning

a) Direct advances to Agricultural and SME sectors.

0.25%

b) Commercial Real Estate (CRE) sector 1.00%

c) Restructured Accounts classified as Standard Advances *

2.00%

c) All other loans and advances not included in (a) and (b) above

0.40%

* Restructured accounts classified as standard advances will attract a provision of 2 percent in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract a provision of 2 % for the period covering moratorium and two years thereafter and restructured classified as non performing advances, when upgraded to standard category will attract a provision of 2% in the first year from the date of up gradation. 6.3. Provision for NPA: Branches shall compute and recommend provision, in Return III, for sub-standard assets, doubtful assets and loss assets as per the norms shown here under. Asset Classification

Rate of Provisioning

1. Substandard Asset (on the balance outstanding without making any allowance for ECGC guarantee cover and securities available)

(a) Secured Exposure under SSA 15%

(b) Unsecured Exposure under SSA* 25%

(c) Unsecured Exposure under SSA in respect of advances to Infrastructure Sector where appropriate mechanism of escrow accounts available and we have a clear and legal first claim on these cash flows

20%

2. Doubtful Asset

(a) On Secured liability

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i)Doubtful assets upto 1 year (DA-1)

25%

ii)Doubtful assets 1 to 3 years (DA-2) 40%

iii)Doubtful more than three years (DA-3) 100%

(b) On unsecured liability covered by DICGC claim received .

Nil

(c) On unsecured liability not covered by DICGC claim received

100%

3. Loss Asset: (on the balance outstanding minus DICGC claim received

100%

6.4. Notes: 6.4.1.Each sub-standard asset shall be classified as either Secured Exposure or Unsecured Exposure and provision shall be made on outstanding balance. Eg: A sub-standard asset with real balance of 10000/- and security of 5000/- is a secured exposure and requires provision of 1500/- i.e., 15% of the balance outstanding. Though there is unsecured portion of 5000/- in the outstanding balance of 10000/-, provision required is only 15% of outstanding balance. 6.4.2. In the case of doubtful assets, secured liability means secured portion of outstanding real account balance and unsecured liability means unsecured portion of outstanding real account balance. 6.4.3. If DICGC claim is received, Claim/Cover available shall be calculated on unsecured liability at the percentage at which claim is settled. 6.4.4. In the case of Doubtful Assets, where sum of DICGC claim received and provision requirement as per the above norms exceeds the real account balance, Provision shall be made for the real account balance less DICGC claim received. In other words sum of provision and DICGC Claims Received shall not exceed the outstanding Real Account balance. 6.4.5. In the case of accounts where DICGC claim is not lodged or is lodged but is not settled, provision shall be made ignoring the pending claim. 6.5. Provision for NPAs where OTS is sanctioned:

In the case of NPAs where OTS proposal has been sanctioned, involving writing off of book balance, which exceeds the provision made as per prudential norms as above, provision may also be made for such exceeded amount as a measure of prudence. This applies in cases where OTS is sanctioned and the provision held is less than the write-off amount involved in OTS. 6.6. Provisioning Requirement in case of DICGC covered accounts: 6.6.1. DICGC Claim Received accounts: i)Sub-standard Assets: A general provision of 15 % or 25% on total outstanding shall be made, for secured and unsecured exposure under sub-standard assets respectively, without making any allowance for DICGC guarantee cover available.

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Ex 1:

A.Balance outstanding in real account 2,00,000

B. Realisable value of security 1,00,000

C. DICGC cover available 1,20,000

D. Total Provision required-15% of A (Secured exposure)

30,000

Ex 2:

A.Balance outstanding in real account 2,00,000

B. Realisable value of security Nil

C. DICGC cover available 1,20,000

D. Total Provision required-15% of A (UnSecured exposure)

50,000

Note: Ignore realisable value of security and amount of DICGC claim received while computing provision on sub-standard assets.

ii) Doubtful Assets: 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 to arrive at the unsecured liability. DICGC claim received available at applicable percentage shall be deducted from unsecured liability to arrive at the unsecured uncovered liability. Provision shall be calculated at applicable percentage for secured liability and @ 100% for unsecured uncovered liability as illustrated below.

Ex. 1: Doubtful one to three years (DA – 2)

Calculation of Secured/ Unsecured liability Case 1 Case 2

A. Balance outstanding in real a/c 200000 200000

B. Realisable Value of security 300000 40000

C. Unsecured liability (A-B) Nil 160000

D. DICGC claim received Nil 96000

E. Unsecured uncovered liability (C-D) Nil 64000

Provision required to be made

i) On secured portion a) Secured liability B or A whichever is less

200000 40000

b) Provision @ 40% of (i) (for DA-2) 80000 16000

ii) On unsecured uncovered liability -100% of E

Nil 64000

Total Provision required 80000 80000

Ex. 2: Doubtful more than three years

Calculation of Secured/ Unsecured liability Case 1 Case 2

A. Balance outstanding in real a/c 200000 200000

B. Realisable Value of security 300000 60000

C. Unsecured liability (A-B) Nil 140000

D. Applicable percentage of DICGC claim received Nil 105000

E. Unsecured uncovered liability (C-D) Nil 35000

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Provision required to be made

i) On secured portion a) Secured liability B or A whichever is less

200000 60000

b) Provision @ 100% of (i) 200000 60000

ii) On unsecured uncovered liability -100% of E

Nil 35000

Total Provision required 200000 95000 iii) Loss Assets: Provision in respect of Loss assets would be equal to outstanding balance less DICGC claim received. Hence 100% provision shall be made after deducting amount of DICGC Claim received from the balance outstanding. Ex:

A. Balance outstanding in real account 200000

B. Amount of DICGC claim received or ECGC cover available/ claim lodged/ claim received, say 75% of A

150000

C. Uncovered balance (A-B) 50000

D. Total Provision required 100% of C 50000

6.7. Valuation of land & building, plant & machinery, vehicles etc: (a) Securities, primary or collateral, such as land and building, plant and machinery, vehicles, etc., obtained as security for advances of 2.00 lakh and above, shall be got revalued through approved valuers, once in 2 years except in the case of Housing Loans which are regular and classified as standard assets. to be obtained. 6.7.1. Valuation of Hypothecated Securities: In the case of advances against hypothecation of goods, the value of the security should be updated by obtaining latest stock statements. In the case of bill liability, realizable value of goods covered under documents of title to goods shall be ascertained and kept on record. 6.7.2. Verification of securities:

It is essential that securities charged to the Bank are inspected at periodic intervals. Branches shall conduct the inspection of all securities charged to the Bank such as stocks, vehicles, plant and machinery, equipments, land and building etc., and maintain record of inspection of securities. 6.7.3 Treatment of security for the purpose of provisioning:

i) Where a borrower enjoys more than one credit facility, the realizable value of the security shall be first reduced to the extent of outstanding liability under the credit facility to which it is taken as primary security and the surplus value of the security, if any, can be taken notionally as security for the unsecured portion of other credit facilities of the same borrower for calculation of provision.

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ii) Where the security is not taken as primary security to any of the credit facilities but treated as a common security to all the facilities, realizable value of such common security shall be apportioned on pro-rata basis to cover the clean portion under each account. iii) In the case of pari passu charge, realizable value of security shall be taken on pro-rata basis. In the case of second/ third charge, realizable value of security minus liability with first/second charge holder alone shall be taken into account.

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7. UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAS

7.1. Up gradation: 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‟. In other words, an account, which became NPA due to non-payment of interest and/or instalments of principal, upon payment of arrears of interest and/or instalments of principal in full, stands upgraded as Standard Asset on the day of clearing the arrears in full. 7.2. Accounts classified as NPA get upgraded to Performing Asset any day during the year by recovery or otherwise. Eg: i)Entire arrears of interest and instalments of loan account are paid and account is fully regularized. ii) Overdrawal allowed in OD/CC account has been regularized or the party has started operating the account within limit/ drawing power. iii) In case of account classified as NPA on account of other account/s of the borrower being NPA, and such other account/s are upgraded/ closed. iv)In case of an NPA, so classified for non-submission of stock statement, non-renewal of limits etc., account is regularized by submission of stock statements or limit is renewed or reviewed. 7.3. In case of a borrower having multiple accounts, the accounts can be upgraded as standard asset only if all the accounts of the borrower are regular on the day of up gradation. Ex: Assume that

A borrower has OD, CDD and LC limits of 10 lakh, 1 lakh and 2 lakh respectively and Term Loan of 4 lakh.

Balance in OD account is equal to or less than drawing power through out the year except during the period 10th October to 31st December, when the balance exceeded drawing power. OD account, on its own, was not out of order for 90 days and hence did not slip to NPA.

Five LCs each amounting to 10 lakh were devolved during 15th December to 30th January. Each LC paid account was closed before completion of 90 days. Hence no LC paid account became NPA, if they are considered as individual loans.

However balance in OD a/c + LC paid liability exceeded the drawing power from 10th October to 15th February. Account became NPA on 7th January.

Account can be upgraded on 16th February as standard asset, provided there is no LC paid liability on that date, term loan is regular and no discounted cheque is overdue. If there is overdue in any account (not necessarily for 90 days) the account shall not be upgraded as standard asset.

7.4. Up gradation of Restructured accounts under Substandard or Doubtful Category: All restructured accounts which have been classified as nonperforming assets upon restructuring, would be eligible for upgradation to the „standard‟ category after observation of „satisfactory performance‟ during the „specified period‟.

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In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. 7.5. Accounts regularised near about the Balance Sheet date:

The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as an NPA. In other genuine cases, branch must furnish satisfactory evidence to the Statutory Auditors/ Inspecting Officers about the manner of regularization on of the account to eliminate doubts on their performing status. 7.6. Regularisation of account for up gradation: Accounts shall be regularised by genuine credits for upgrading the account from NPAs to standard assets. Regularisation of accounts by allowing TOD/ Ad hoc limit, rephasement of instalments, conversion of loan, discounting/ purchasing of accommodation cheques, transfer of funds from accounts of sister concern, other than for genuine trade/ business related transaction etc. shall not allow the account to be upgraded as standard asset.

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8. ACCOUNTING PROCEDURE – NON-PERFORMING ASSETS

8.1. Income Recognition: Income from Non-performing assets is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, interest on NPAs shall be charged to the account only when it is actually received. As and when recovery is made in NPAs, expenses incurred but not charged to the account shall be debited to the account and credited to Misc. Income first. Balance of recovery made or interest up to the end of the previous month not charged to the account whichever is less shall be debited to the account and credited to Interest on NPA. After debiting the expenses and interest to the NPA (Real account), balance in real account shall not exceed the balance in shadow account since balance in shadow account is the total due of the borrower. 8.2 Interest Reversal: The unrecovered portion of interest debited, during the current year and past periods, in accounts that have slipped to NPA during the current quarter shall be reversed as at the end of the quarter. This will apply to Central Govt. guaranteed accounts with overdues more than 90 days also, though such accounts are treated as standard asset. Guidelines are furnished below. 8.2.1 Non-performing Loans, Non-operative NPOD and other Non-performing accounts: i) NPLs, Non-operative NPODs and other NPAs as at the end of previous quarter: In the case of accounts which were classified as NPAs as at the end of the previous quarter and continue to be NPA as at the end of current quarter also, interest reversal as at the end of current quarter does not arise as interest is being collected in such cases on cash basis only. ii)NPLs, non-operative NPODs and other NPAs slipped during the current quarter: In the case of accounts which were classified as performing/ standard assets as at the end of previous quarter but classified as non-performing assets (NPA) as at the end of current quarter, branches shall first debit interest on accrual basis upto the end of the current quarter. Thereafter, the unrecovered portion of interest debited during the current year and past periods shall be reversed by passing the following entries. Debit: Interest income on Performing Assets. Credit: Loan/non-operative OD/CC account/other accounts of the borrower. 8.2.2. Operative NPOD Accounts: i)Operative NPOD accounts as at the end of previous quarter:

In case of operative NPOD accounts, the interest reversal made as at the end of the previous quarter shall be debited to the NPOD accounts, on 1st day of the current quarter and monthly interest shall be continued to be debited on accrual basis during the current quarter. This procedure is laid down to ensure that credits received in operative NPOD accounts, during the current quarter are appropriated first towards interest. Unrecovered

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portion of interest, if any, in these accounts as at the end of current quarter shall be reversed by passing following entries: Debit: Interest income on NPAs Credit: Operative NPOD account of the borrower The unrecovered portion of interest in operative NPOD account shall be ascertained as under: a) Total interest debited to NPOD Account during the current quarter (Including the interest debited to operative NPOD account on 1st day of current quarter). ......... b) Less: Total credits received during the current quarter (Adjustment entries & credits redebited shall be excluded) ......... c) Unrecovered portion of interest to be reversed as at the end of current quarter (a-b) ......... ii) Operative NPOD Accounts slipped during the current quarter:

In the case of operative overdraft accounts classified as non-performing assets (NPA) for the first time as at the end of the current quarter, branches shall first debit interest on accrual basis upto the end of the quarter. Thereafter, the unrecovered portion of interest debited during the current year and past periods shall be reversed by passing the following entries.

Debit: Interest income on Performing Assets. Credit: Operative Overdraft Account of the borrower. iii)Interest reversal made in operative NPOD accounts, as indicated in i) and ii) above, as at the end of the current quarter shall be debited to respective NPOD account on 1st day of the next quarter before any other transaction in the account by passing the following entries so that any credit received in the account is appropriated towards the interest due in the account. Debit : NPOD account Credit: Interest income on NPAs Thereafter, branches shall continue debiting future monthly interest on accrual basis. 8.2.3. Bills: In case of cheques, drafts, bills discounted which are classified as NPA, the question of reversal of interest as at the end of the current quarter does not arise as interest on overdue bills is not debited and taken into income account unless collected in cash. However, branches shall calculate interest receivable (compounded monthly) on all overdue bills outstanding as at the end of the current quarter and pass the following contra entries: Debit: Interest receivables on Overdue Bills A/c. Credit: Unrealized interest on Overdue Bills A/c. The contra entries already passed at the end of previous quarter shall be reversed.

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8.2.4. Advances guaranteed by Central Govt.:

Advances guaranteed by Govt. of India (Central Govt.) with overdue for more than 90 days may be treated as standard asset unless the guarantee is repudiated by the Govt. when invoked by the Bank. However, the interest on such advances shall not be taken into income unless the interest has been recognized. In such cases, interest reversal shall be made as indicated in para 9.2.1 or 9.2.2 above as the case may be. 8.3. Expenses incurred in Suit-filed account: 8.3.1 In terms of RBI guidelines, legal and other expenses incurred in respect of suit filed accounts shall be charged to Profit and Loss Account at the time of incurrence and not to suit-filed account Therefore Expenses incurred in respect of suit-filed accounts shall be first debited to Suit-filed (Real) account and paid.

Debit: Suit-filed account Credit: SB /PO issued/ IBDD (for making payment)

8.4. Transfer of PAs to NPAs:

i) Outstanding balance, after interest reversal, in accounts which have slipped to NPA during the quarter, shall be transferred to NPL/NPOD/NPB/NPPC/NPPSC as at the end of the quarter by passing following entries. Debit: NPL/NPOD/NPB/NPPC/NPPSC account Credit: Respective loan/ OD/Bill account ii) NPAs upgraded, as standard asset during the quarter, shall be transferred to respective loan account by passing following entries. Debit: Respective loan/ OD/Bill account Credit: NPL/NPOD/NPB/NPPC/NPPSC account 8.5. Unrealised Interest in NPA and Shadow account: 8.5.1. Branches shall maintain shadow accounts for all NPAs, which shall depict the total dues of the borrower including uncharged interest and unrecovered expenses. Hence, shadow accounts shall be opened as at the end of the quarter, for all accounts slipped to NPA during the quarter. The amount transferred from Standard accounts (DL/OSL/OD/FL etc) to Non-performing accounts as at the end of the quarter shall be the opening balance in the shadow account. The unrecovered portion of interest reversed as at the end of the quarter shall be added in the shadow account. The following contra entries shall be passed for the unrecovered portion of interest. Debit: Interest Receivable on NPAs Credit: Unrealised interest on NPAs 8.5.2. The unrecovered expenses in suit filed accounts, if any, shall be added in the shadow account. The following contra entries shall be passed for the unrecovered expenses. Debit: Expenses Receivable on Suit Filed account Credit: Unrealised Expenses on Suit Filed account

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8.5.3. Branches shall calculate interest on all NPAs at stipulated rates, add the interest in the respective shadow accounts and account for the same by passing the following contra entries. Debit: Interest Receivable on NPAs Credit: Unrealised interest on NPAs Out of the total recovery in NPA, amount recovered towards interest shall be ascertained and transferred to Interest on NPA by passing following entries. Debit: NPA account Credit: Interest income on NPA The following contra entries shall be passed for the recovery towards interest. Debit: Unrealized interest on NPAs Credit: Interest Receivable on NPAs Note: The difference between shadow balance and real balance is the unrecovered interest in case of non-suit-filed NPAs and unrecovered expenses and interest in case of suit-filed accounts. 8.5.4. Branches shall pass the above entries correctly so that Shadow balance depicts the total dues of the borrower on any day and tallies with the sum of Real account balance, Interest Receivable on NPA and Expenses Receivable on suit-filed accounts. 8.5.5. Branches shall confirm that i)Shadow accounts are maintained for all NPAs ii)Shadow balance tallies with the sum of Real account balance, Interest Receivable on NPA and Expenses Receivable in suit-filed accounts. iii)Balance in Interest Receivable on NPAs in General Ledger is the sum of the interest receivable in all individual NPA accounts and iv) Balance in Expenses Receivable account in General Ledger is the sum of the expenses receivable in all suit-filed accounts.

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9. SUBMISSION OF RETURNS

In the backdrop of migration to CBS, auto movement of NPAs is underway. The CDC will provide the list of NPA accounts and branches have to verify the list of NPA accounts and after cross checking with actual status of accounts, they have to prepare the Return No.

I,II,III & IV manually.

While preparing the NPA annual returns pertaining to advances, as on 31.3.2012 the following guidelines be observed/noted/kept in view without fail and comply with the same. 9.01. RETURN-I: It is for reporting Borrower- wise and Asset wise classification of NPAs as at 31.03.2012

in Return-1, use separate sheet in accordance with classification, by ticking the box “√ ” wherever applicable.

The amount shall be furnished In Rupees. 9.02. RETURN-II: It is for reporting purpose wise and Asset Wise classification of advances (Standard

Assets and NPAs) In the said statement it is to be noted that the DICGC Claim Received Amount shown in Return II shall be equal to the DICGC Claim Received amount shown in Trial Balance under DICGC Claim received Head. In the return, the amount shall be corrected to nearest ‘thousand’. Decimals shall not be used.

9.03. RETURN-III: It is for reporting Summary of NPAs and provisioning requirements as at 31.03.2012. The amount shall be furnished in Rupees.

9.04. RETURN-IV: It is for reporting Asset wise NPAs under Government sponsors Schemes as at 31.03.2011 (Amount shall be furnished in thousands.

9.05. Preparation of Returns:

The Return-I (green colored sheets) is to be prepared in duplicate and submit the original to Regional Office retaining the copy for branch records. (Return-I need not be submitted to HO).

The returns II, III & IV are to be prepared in Triplicate and submit the original to Regional Office, retaining two copies at the branch (one in NPA Returns file and the other in Audited statements file).

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Return II & III are incorporated in one sheet and Return IV is devised in a separate sheet.

Return – I format is printed on both sides of the sheet. Branches are advised to use separate sheet (one side or both sides depending upon the need) for each category of asset under suit filed and non-suit filed A/cs for both Existing and NEW NPAs separately by marking a Tick “ √ “ in relevant box provided on the top of the return.

While reporting the NPAs in RET-I, all outstanding NPAs under Crop, DL, MT Loan etc (General Category) are to be written first and thereafter the NPAs outstanding under various Government sponsored loans may be written scheme-wise separately. This is to facilitate the branch to report the details of Govt. sponsored loans in RET-IV correctly and easily. 9.06. Submission of Returns:

All branches are advised to submit - i). NPA Flash Report to Regional Office by 02.04.2012 ii).Annual Return I, II, III & IV so as to reach Regional Office concerned by 05.04.2012.

Regional Offices are advised to: i). Communicate the consolidated NPA Flash Report to HO on 02.04.2012

ii). Ensure that the returns are verified and consolidated immediately. The consolidated Returns of II, III, IV shall reach Head Office by 6.04.2012 unfailingly. 9.07. SUPPLY OF PRINTED ANNUAL RETURNS:

Sufficient numbers of printed NPA annual returns forms are supplied to Regional Offices for onward supply to branches. Buffer stock is being supplied to Regional Offices to meet the additional requirement of branches, in case of need. All columns of the NPA returns are self-explanatory. Branches shall note that the divergence in classification of assets, non-compliance of RBI/NABARD guidelines, if any noticed, would be viewed seriously. We would like to reiterate that deterrent action including monitory penalty will be imposed against the official/s responsible for such wrong classification/concealment. Branches are once again advised to thoroughly go through all the guidelines and ensure classification of assets properly and calculate the provisions accurately and submit the returns in time.

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Annexure-1

AGRICULTURAL ADVANCES TO WHICH PRUDENTIAL NORMS ARE APPLICABLE

DIRECT FINANCE

1.1. Finance to individual farmers [including Self-Help Groups (SHGs) or Joint Liability Groups (JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on such finance] for Agriculture 1.1.1. Short-term loans for raising crops, i.e. for crop loans. This will include traditional / nontraditional plantations and horticulture. 1.1.2. Advances up to 10 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months, irrespective of whether the farmers were given crop loans for raising the produce or not. 1.1.3. Working capital and term loans for financing production and investment requirements for agriculture. 1.1.4. Loans to small and marginal farmers for purchase of land for agricultural purposes.

1.1.5. Loans to distressed farmers indebted to non-institutional lenders, against appropriate collateral or group security.

1.1.6. Loans granted for pre-harvest and post-harvest activities such as spraying, weeding, harvesting, grading, sorting, processing and transporting undertaken by individuals, SHGs and co-operatives in rural areas. 1.1.7 Loans granted for agricultural activities, irrespective of whether the borrowing entity is engaged in export or otherwise. The export credit granted by banks for agricultural and allied activities may, however, be reported separately under heading “Export credit to agricultural sector”.

1.2. Finance to others [such as corporates, partnership firms and institutions] for Agriculture 1.2.1. Loans granted for pre-harvest and post harvest activities such as spraying, weeding, harvesting, grading, sorting and transporting.

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Annexure -2

MINIMUM BALANCE METHOD FOR INTEREST REVERSAL & ASSET CLASSIFICATION

For the limited purpose of identifying NPA status and unrecovered portion of interest in the case of loans, any credit received is to be first adjusted towards expenses and interest in the chronological order of date of debit and any advance payment received is to be notionally set off towards interest debited subsequent to the date of receipt of advance payment. Hence, in the case of loan (except partly released loans), the minimum balance outstanding on a particular date indicates that all the interest and expenses debited to the loan prior to that date stands fully recovered. This implies that –

i) The difference between the original advance and minimum balance indicates the repayment received towards the principal. Repayment towards principal = Original advance – Minimum balance ii) The difference between the present balance and minimum balance indicates the arrears of interest and charges i.e. interest and charges debited to the loan but not paid by the borrower. Interest arrears = Present balance - Minimum balance – Advance payment, if any From the above two data, the asset classification and unrecovered portion of interest in the case of loans can be determined. This is illustrated below. ILLUSTRATION - 1: Term Loan classified as Fresh NPA as on 31st March. Date of Agreement : 4th June Original advance : Rs. 50,000/- Repayment: 1000/- per month commencing from: 4th July

Date Dr. Cr. Balance

June 04 To amount advanced 50000 50000

June 30 To int. upto 30th June 480 50480

July 04 By Cash 1500 48980

July 31 To int. upto 31st July 579 49559

Aug 10 By cash 1500 48059

Aug 31 To int. upto 31st Aug 534 48593

Sep 22 By cash 1200 47393

Sep 30 To int. upto 30th Sep 515 47908

Oct 31 To int. upto 31st Oct 528 48436

Nov 17 By cash 1500 46936

Nov 30 To int. upto 30th Nov 524 47460

Dec 01 By cash 1500 45960

Dec 31 To int. upto 31st Dec 489 46449

Jan 31 To int. upto 31st Jan 510 46959

Feb 03 By cash 400 46559

Feb 28 To int. upto 28th Feb 493 47052

Mar 31 To int. upto 31st Mar 509 47561

Note: The account was not NPA as on 31st December.

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Determination of Asset Classification & Date of NPA:

Step – 1: Asset Classification on the basis of non-payment of instalment: Repayment towards principal = Original advance-minimum balance

50,000-45960= 4040 No. of instalments paid = Repayment towards principal / Amount of instalment

4040 / 1000 = 4.040 The borrower has paid four instalments i.e. instalments upto 4th October. The instalment due on 4th Nov is not fully paid. Hence the account became NPA on 2nd Feb (i.e. 90 days after 4th Nov). Step – 2: Asset classification on the basis of non-payment of interest: Interest arrears = Present balance - Minimum balance - Advance payment

47561- 45960 - 0 = 1601 Add debit entries backwards till the total just crosses the figure of 1601/- to find out the earliest date of unpaid interest as under: -

31st March 509 509

28th Feb 493 1002

31st Jan 510 1512

31st Dec 489 2001

Arrears of interest of .1601/- is greater than .1512/- but less than .2001/-. This means that interest of .489/- pertaining to month ended 31st Dec is not fully paid. Hence the account became NPA on 31st Mar (i.e. 90 days after 31st December). As per step-1, the date of NPA with reference to non-payment of instalment is 2nd Feb and as per step- 2, the date of NPA with reference to non-payment of interest is 31st Mar. Earliest of these two dates i.e. 2nd Feb is the date of NPA. Calculation of unrecovered portion of interest:

As the account is classified as Fresh NPA as on 31st March the unrecovered portion of interest debited during the current year and past periods is required to be reversed. As per Step-2 above, the unrecovered portion of interest (i.e. entire interest arrears) is 1601/-. This shall be split up as under: i) Unrecovered portion of interest relating to current year – Rs. 1601 ii) Unrecovered portion of interest relating to past period - Nil iii) Total interest arrears to be reported in Return V - . Rs.1601 ILLUSTRATION - 2: Term Loan classified as Fresh NPA as on 31st Mar. Date of Agreement: 6th May Original advance: .50,000/- Repayment: Equated monthly instalments of .1300/- per month commencing from: 6th June

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Date Dr. Cr. Balance

May 06 To amount advanced 50000 5000

May 31 To int. upto May 31 392 50392

June 06 By Cash 1300 49092

June 30 To int. upto June 30 634 49726

July 11 By cash 1300 48426

July 31 To int. upto July 31 522 48948

Aug 22 By cash 1300 47648

Aug 31 To int. upto Aug 31 536 48184

Sep 25 By cash 1300 46884

Sep 30 To int. upto Sep 30 512 47396

Oct 14 By cash 1300 46096

Oct 31 To int. upto Oct 31 515 46611

Nov 30 To int. upto Nov 30 516 47127

Dec 31 To int. upto Dec 31 504 47631

Jan 12 By cash 500 47131

Jan 31 To int. upto Jan 31 522 47653

Feb 03 By cash 300 47353

Feb 28 To int. upto Feb 28 538 47891

Mar 31 To int. upto Mar 31 527 48418

Note: The account was not NPA as on 31st Dec. Determination of Asset Classification & Date of NPA: Step – 1 : Asset Classification on the basis of non-payment of instalment:

Total Repayment received in the account = 7300 Number of Equated monthly instalments received = Repayment received / EMI

= 7300/ 1300 = 5.61 The borrower has paid five equated monthly instalments i.e., upto 6th Oct. The instalment due on 6th Nov is not fully paid. Hence the account became NPA on 4th Feb (i.e. 90 days after 6th November). Step – 2: Asset classification on the basis of non-payment of interest:

Since the loan is repayable in EMIs, NPA status in respect of this loan shall be determined on the basis of non-payment of EMIs and not with reference to the date of debit of monthly interest.

Date of NPA with reference to non-payment of EMI is 4th Feb and hence 4th Feb is the date of NPA. Calculation of unrecovered portion of interest: As the account is classified as Fresh NPA as on 31st Mar, the unrecovered portion of interest debited during the current year and past periods shall be reversed. Interest arrears = Present balance - Minimum balance

= 48418- 46096 = 2322 This shall be split up as under: - i) Unrecovered portion of interest relating to current year – Rs.2322 ii) Unrecovered portion of interest relating to previous year - Nil iii) Total interest arrears to be reported in Return V as on 31st Dec – Rs.2322

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Annexure-3

NPA FLASH REPORT Branches are required to submit the NPA Flash Report as on 31.03.2012 to respective Regional Office along with annual NPA Returns. Amount shall be furnished in THOUSANDS eliminating decimals as per the example shown hereunder

Code Details Amount

A NPAs as on 31.03.2011 2050

B Add:Increase in existing NPA due to operations during the year 20

C Add:Fresh NPAs added during the year 370

D Add:Increase in NPAs due to transfer from other branches 80

E Less:Reduction in NPA due to transfer to other branches 20

F Less:Reduction in NPA due to upgradation from NPA to PA 100

G Less:Reduction in NPA due to General Write-off 40

H Less:Reduction in NPA due to Write off in OTS 10

I Less:Reduction in NPA due to operations during the year 20

J Less:Reduction in NPA due to recovery towards principal 180

K

NPAs at the end of the year (A+B+C+D-E-F-G-H-I-J)

2150

L Total Provision required for outstanding NPAs on 31.03.2012 1020

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Annexure-4

NPA TRACKING - IMPORTANT STEPS TO BE OBSERVED

All the accounts are processed by the System during End of Day Process (EOD) for deciding the NPA / IRAC status of the accounts. Proper understanding of the NPA Tracking system in CBS is essential so that the IRAC status of every borrowal account is correctly depicted in the system. IRAC status is the Risk Grade that system populates whenever an account becomes overdue. Various Risk Grades and their description are explained below.

RISK GRADE

DESCRIPTION

00 Standard Asset

01 Standard But Temporarily Irregular Asset

02 Standard But Irregular for Over 60 Days

04 Sub-Standard Asset

05 Doubtful Asset – Less than 1 Year

06 Doubtful Asset = > 1 Year but < 3 Years

07 Doubtful Asset = > 3 Years

08 Loss Asset

The NPA functionality running in EOD stamps the NPA status (Risk Grade) as per the System as NEW IRAC STATUS, which is only INDICATIVE, as it does not trigger any action connected to an NPA unless confirmed by the operating staff at any time before the END OF THE YEAR (EOY). The OLD IRAC STATUS as on the previous EOY will continue to be operative until, either the staff confirms the NEW IRAC STATUS in CBS when the NEW IRAC STATUS is stamped as OLD IRAC STATUS or at the EOY process or on the date designated by the CDC as the NPA stamping date. This is the actual IRAC status of a loan account. The operating staff confirms the New IRAC status during year-end or any time during the year. The confirmed status is reflected under the column OLD IRAC STATUS. Therefore, to trace the NPA status of an account, the user has to refer only this column. The system starts the NPA processes such as non-application of interest and segregation of INCA automatically. Rate of Interest in the loan account is not going to be zeroised upon the status change to „04‟ or above. Interest accruals will continue in the loan account but the same will not be applied to the account. The user thus can ascertain the interest accruals (on simple interest basis) in respect of NPA accounts at any point of time. DATA INPUT AFFECTING THE NPA STATUS IN TL / DL ACCOUNTS & CC/OD Accounts: 1. TENURE: The total tenure of the loan account, including, moratorium and repayment period in number of months to be correctly calculated and furnished in the field LOAN TERM while opening the account. 2. REPAYMENT SCHEDULE: As the Repayment schedule is the IMPORTANT condition in NPA tracking in respect of Loan accounts; the following areas need critical attention:

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a) Moratorium period to be invariably reckoned in the Loan Term in respect of all accounts as discussed above and more particularly Housing and Education loans. b) Start Month for the repayment of Principal and Interest (including interest for Moratorium Period) to be correctly furnished. c) While creating Repayment Schedule, out of the four available options, viz.,1. EMI; 2. Princ Eq Distr; 3. Projected Interest; 4. Negotiated Repayment, the correct option depending upon the terms of sanction has to be selected. d) Negotiated repayment and Projected interest option shall not be selected. 3. DISBURSEMENT: In case the borrower has not availed the entire sanctioned limit, the repayment schedule has to be regenerated after crystallising the amount of loan availed by the borrower, so that the Repayment schedule shows the correct EMI amount. 4. REPHASEMENT: In case of a rephased loan account, the repayment schedule has to be regenerated based on the terms of rephasement approved. 5. Limit & Expiry Date for CC/OD Accounts: The expiry date of the limit has to be given correctly in the LIMIT DATA ENTRY screen otherwise the DP would be zeroised on the limit expiry date even when there is adequate security. On renewal of the limit, the revised expiry date had to be input in the system. Explanation for the codes (Screen No 10400) generally used in the CBS application is given hereunder for the benefit of and clear understanding by the Branches.

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Bal : Total outstanding Balance (For NPA account , this includes Interest

Receivable called INCA) Repay : Installment amount Rem Repay : Remaining term as per the repayment frequency set by the branch Theo Balance : Ideal Balance to be held in the account Li Inc : Per day interest (normal interest) Li Acc : Interest Accrued (normal interest) but not debited from last interest

applied date Ar Inc : per day overdue interest Ar Acc : Interest Accrued (overdue interest) but not debited from last interest

applied date Arr/Adv : If this column shows the amount without any sign, then the account

is irregular to the extent of amount shown in this field. If this is shown with –ve sign, then there is advance payment. System will arrive this amount by the formula i.e., Outstanding balance-Theo Balance (Ideal Balance).

Last Arr Date : Overdue date INCA : (Interest Not collected Account) Interest reversal amount for an

NPA account. For regular account this shall be zero.

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Arr Acc : After a regular account is classified as NPA , system will not debit interest to the account but starts accruing the interest amount in this field.

When a loan account is sanctioned, repayment schedule will be generated. After generation of repayment schedule, Theo Balances and Installment Amount will be populated by the system based on the disbursement amount till the loan repayment term gets completed. On completion of loan term, Theo Balances will become zero. System will arrive at the Arrear amount (overdue amount) using the following logic Arrears=Outstanding Balance-Theo Balance So, Arrear amount and Theo Balances are inter related. For migrated accounts, there is a possibility of migration of wrong theo balances. The reasons for migration of wrong Theo balances were due to improper data feeding in TBM. If the arrear amount is found wrong, Theo Balances should have gone wrong. If Theo Balances/Arrear Amount is found wrong by the branch, the following procedure has to be followed in order to adjust correct Theo Balance/ Arrear Amount.

INCREASE IN THEO BALANCE OR DECREASE IN ARREAR AMOUNT

Example: Theo Balance in an account is Rs.10000/-, Arrear Amount is Rs.2000/- and Outstanding Balance is Rs.12000/-. Here Outstanding Balance-Theo Balance=Arrear Amount i.e.,12000-10000=2000 If the branch identifies correct arrear amount as Rs.1000/- or theo balance as Rs.11000/-, the following procedure has to be followed. DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Adjust Overdue/Prepayment Balance Credit

Screen No.\\SCR 12577 Loans: Adjust Arrears/Advance Credit appears Enter the account number and in the Adjustment field, enter the net of the Theo balance to be increased or arrear amount to be decreased i.e., Rs.1000/- and select Promo No as No Fees. Click on Transmit. Queue will be generated. Authorize the queue. DECREASE IN THEO BALANCE OR INCREASE IN ARREAR AMOUNT If the branch identifies correct arrear amount as Rs.3000/- or Theo balance as Rs.9000/-, the following procedure has to be followed. DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Adjust Overdue/Prepayment Balance Debit Screen No.\\SCR 12477 Loans: Adjust Arrears/Advance Debit appears Enter the account number and in the Adjustment field, enter the net of the Theo balance to be increased or arrear amount to be decreased i.e., Rs.1000/- and select Promo No as No Fees. Click on Transmit. Queue will be generated. Authorize the queue. After modifying Theo Balance/Arrear Amount, branches have to regenerate Repayment Schedule for Theo Balances for the remaining term once again in the following path.

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DL/TL Accounts & ServicesLoan ProcessingGenerate Repay Schedule – Theo Balance

Enter the account number, in the Action field select “A:Amend” and in the Option select 1.EMI or 2. Princ Eq Distr based on the repayment type of the account and click on Transmit. Next screen appears as shown below.

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Enter the Principal and Interest Repay Start date (only month and year) and select repayment frequency. Generation of Repayment schedule will be allowed for future dates only. So branch has to enter next installment date (i.e., If a loan account is disbursed on 01.04.2010 and installment start date is 03.05.2010 and on 04.03.2012 branch wants to generate repayment schedule ,branch has to enter principle repay start date and interest repay start date as 042012). System will not allow to enter back dates. Click on Transmit. Queue will be generated. Authorize the queue. System will generate the repayment schedule based on the outstanding balance and remaining term and there is a possibility of change in EMI/Installment. After modifying Theo Balance/Arrear amount and regeneration of repayment schedule, branches can see these changes in screen number scr: 10400.( short enquiry screen). Once auto movement of NPA is activated, system will automatically populate the NEW IRAC STATUS. During EOY (End of Year) process, system will automatically update the OLD IRAC STATUS based on NEW IRAC STATUS. So the accounts which are having NEW IRAC STATUS of 4 will update or replace with OLD IRAC STATUS to/with NEW IRAC STATUS and these accounts will be classified as NPAs. If any account is not NPA as per the list manually arrived by the branch, before EOY process, branches have to manually change NEW IRAC STATUS to 00 (standard) so that system will not move these accounts as NPA. The procedure to change NEW IRAC STATUS is explained below. For DL/TL Accounts:

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DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Amend/Enquire NPA Status – TL/DL For CC/OD Accounts: DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Amend/Enquire NPA Status – CC/OD Enter the account and click on Transmit.

In this screen, system displays the NEW IRAC STATUS as 4 (DIGIT) and above. For the accounts which are not NPA as arrived at by the branches have to change the NEW IRAC STATUS to 00 and make the Update OLD IRAC STATUS field as Y:YES and click on Transmit. Queue will be generated. Authorize the queue. During authorization, system will prompt for Supervisor over ride in the following screen.

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Officer authorizing the queue shall give his employee number and password and click on Local Supervisor. O.K. message appears. During EOY process at CDC, system will pass the following entries regarding interest reversal. System will automatically populate the amount of interest reversed for each account in INCA field. This amount is included in Bal field and shows the amount of interest receivable in that particular account. Based on the total interest amount to be reversed for all NPA accounts system will pass the following entries. Debit - Interest on Loans Credit - Interest Not Collected Account (CGL level) 2249070601 Example: A loan account with an outstanding balance of Rs.53500/- and the unpaid interest (interest reversible) is Rs.2500/-, at the EOD process, system will show the Balance as Rs.53500/- and INCA field as Rs.2500/- and will pass the following entries. Debit - IOL - Rs.2500/- Credit -INCA Account (CGL level) 2249070601 - Rs.2500/- If there is a recovery of Rs.1500/-, system will show BAL as Rs.52000/- and INCA as Rs.1000/-. During EOD, system will debit Rs.1500/-to Interest Not Collected Account CGL (2249070601) and credit to IOL head.

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CLASSIFICATION OF LOSS ASSETS:

System will not classify an account as Loss Asset automatically. Hence for classification of an account to Loss Asset, branches have to manually modify the NEW IRAC STATUS to 08 and make the Update OLD IRAC STATUS field as Y: YES as per the procedure explained above. PROVISIONING: System will not make any provision on NPA accounts. Hence branches have to manually make provisions based on the asset type and security. STATEMENTS: CDC will provide a report namely “List of NPA Accounts”. Branches have to verify the report and NPA returns and any other statements related to NPA have to be drawn manually.

ACCOUNTING PROCEDURE FOR NPA ACCOUNT

Whenever credits received for NPA account, the amount will be first adjusted to charges, then to INCA, after INCA getting nullified remaining amount will be adjusted to book balance. Interest that is cumulated from the date of NPA to till date will be populated in Arr Acc and Li Acc field. Amount outstanding in this Arr Acc and Li Acc buckets will be capitalized only at the time of full settlement (Closure) of the account. Therefore, on recovery of NPA account branches have to capitalize amount outstanding in Arr Acc and Li Acc buckets,

PROCEDURE FOR CAPITALIZATION OF ARR ACC AMOUNT DL/TL Accounts & ServicesCommon ProcessingOverdue/NPAForced Arrear Accrual Capitalization (Screen No.11081)

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Enter the account number and Arr Acc amount in Amount field and click on Transmit. Queue will be generated. Authorize the queue. After authorization, “INCA” amount and Bal will be increased to the extent of Arr Acc which was adjusted in the earlier screen.

PROCEDURE FOR CAPITALIZATION OF LIACC AMOUNT

DL/TL Accounts & ServicesInterest AdjustmentsForced Debit Interest Capitalization (Screen No.11091)

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Enter the account number and Li Acc amount in Amount field and click on Transmit. Queue will be generated. Authorize the queue. System will pass the following vouchers. Debit - Loan account Credit - Interest Not Collected Account (CGL level) 2249070601 Therefore outstanding balance will increase to the extent of LiAcc amount. Now branches can post the credit voucher normally.

UPGRADATION OF NPA ACCOUNT TO PA Before up gradation of NPA account to PA, the following fields should be nullified

a) LIACC b) ARRACC Arr Acc and Li Acc shall be nullified as per the procedure explained above. c) INCA (after posting a credit voucher, system will automatically nullify INCA amount, if not nullified branches shall the following procedure). After nullifying the above heads, branches have to modify the NEW IRAC STATUS as 00

PROCEDURE FOR MODIFICATION/NULLIFICATION OF INCA AMOUNT :

Even after posting a credit voucher to an NPA account, if the INCA amount is not nullified the following procedure has to be followed for nullification of INCA amount by the branches.

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Branches have to nullify the amount of INCA field in the following path. DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Cr/Dr Adjustment for UIPY/INCA-TL/DL for loan accounts (or) DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Cr/Dr Adjustment for UIPY/INCA-CC/OD for CC/OD accounts

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Enter the account number and in the Action field select “1.Decrease INCA/UIPY” and click on Transmit. Next screen appears as follows.

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In INCA Cr adjustment field enter the INCA amount noted in Short Enquiry screen and click on transmit. Queue will be generated. Authorize the queue. After nullification, branches have to pass the following vouchers manually. Debit - INCA A/C PUB-OTH -(BGL 98876) Credit - Interest on Loans MAKING NEW IRAC STATUS AS 0 AND UPDATING THE SAME IN OLD IRAC STATUS For DL/TL Accounts: DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Amend/Enquire NPA Status – TL/DL For CC/OD Accounts: DL/TL Accounts & ServicesCommon ProcessingOverdue/NPA Amend/Enquire NPA Status – CC/OD

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In the screen, make the NEW IRAC STATUS to 00 and Update Old IRAC Status field as Y:YES and click on Transmit. Queue will be generated. Authorize the queue.

Now the IRAC STATUS has been changed making NPA to Performing Asset.