CLASSIFICATION OF ASSETS IN BANKS

CLASSIFICATION OF ASSETS

In order to facilitate assessment of general quality of advances portfolio and to enable the bank to make adequate provisions, the loan assets are required to be classified into the following four categories.

1)                   Standard Asset:

There are the assets, which are not NPA. It does not disclose any problem and does not carry more than normal risk attached to the business. All performing assets are standard assets where interest is paid regularly and installments are received regularly. A provision of 0.25% is to be mad'e on such assets.

2)        Sub-standard Asset:

It is an asset, which has remained as non-performing asset for a period not exceeding two years. In such cases, the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full. In other words, such an asset will have well defined credit weakness that put in danger the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.

In case of term loans, where installments are overdue for period exceeding one year but not exceeding two years should be treated a substandard. An account where the terms of the loan agreement regarding interests and principal have been renegotiated or rescheduled after commencement of production should be classified as substandard and should remain in such category for at least two years of satisfactory performance under the renegotiated or rescheduled terms. In other words the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of the above condition. If installment or interest is overdue for a period of two quarters, the entire outstanding of the account will be considered as substandard up to two years thereafter.

Regarding advances granted to units under rehabilitation, the existing credit facility is to be treated as substandard or doubtful.

As regards additional facilities sanctioned as per package, finalized by BIFR and/or term lending institutions, banks in consultation with statutory auditors will take a view whether there is a need to make provisioning or not.

3)        Doubtful Assets:

An asset, which has remained a non-performing asset for a period exceeding two years, will be treated as doubtful asset. Starting March 2001, an asset will have to be classified as doubtful if it remains in the substandard category for 18 months. They have all the weakness inherent in substandard assets with the added characteristic that collection or liquidation of the dues is highly improbable. As in the case of substandard assets, here again renegotiations/rescheduling does not entitle a bank to upgrade the quality of the account automatically.

A loan classified as doubtful has all the weaknesses inherent in that classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improvable.

4)       Loss Assets:

A loss asset is one where the loss has been identified by the bank or by internal or external auditors or by the cooperative department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly.

In other words, such an asset is considered uncollectible and its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.