Modification of Asset Classification

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Earlier, all the asset classifications were manually done. So, all the sub-standard statuses like D-1, D-2, D-3, etc. are called Risk Grade or RG status in the bank. Now, these things are a little bit more complicated and more technical. About these manual interventions, the RBI has said that you cannot do it manually. Now this will be a challenge for the banks because it was done manually and it was also actually very helpful to manage the NPAs but now the RBI has become extremely strict and they have said that all these things like D1, sub-standard, the different SMA accounts, etc. will be automatically marked by the system and all these automatic things they must be in place from June 30, 2021. So, that is the day by which all the systems have to be automated. Now, apply csp people really have to comply otherwise, they will have some final actions by the RBI.

Provision made for sub-standard loans.

If you have sub- standard loans that up to six months, then, 15% provisioning has to be done. Then, about six months to 1 year you also have to have 15%. If it is unsecured then, 25% for other loans and 20% for infrastructure loans.

For the doubtful one category, you have to have normal commissioning of 25% for the secured asset and for the unsecured asset, it is hundred percent and for the doubtful-2, it is 40% and hundred percent for the unsecured asset and so on and so forth, you have 100% for the rest of the things. These percentages are the percentage of their outstanding amount of the loan. So, you have to have provisions of this much percentage out of the total value that is outstanding in those loans.

Provisions made for standard assets.

You also have to have these provisions made for the standard assets, so if you have any direct advances to agriculture or SME sector, then you have to have 0.25%, for the commercial real estate sector it is 1%, for the commercial real estate housing sector, it is 0.75% and for all of the loans and advances, it is 0.4 % and for the small and the micro enterprises, it is 0.25%. For the medium enterprises, it is actually 0.4%, same as the other loans. Some important NPA related terms, so there is something called quit mortality.

So, if any account becomes NPA within two years of the dispersal of the loan that it is called a quick mortality and special things have to be done by the bank for these loans. Then, we have wilful default. So, these are the people like the Neerav Modi and Vijay Mallya, the people who do not pay back the money and they just run away. So, people who have the capacity to actually payback but they do not pay.

So, those are called a willful defaulter and then you have something called the diversion of funds and siphoning of funds. So, diversion of funds means that you are mutualizing your funds, for example, you take a loan for buying a house and then you are not using the loan to do that exact thing but you are putting it into your business or something like that.

So, sometimes people take term loans and they will be using it as cash credit and some day-to-day activities, that are called the diversion of funds and it is a misutilization basically. Siphoning of funds is basically taking the money from the bank and then channeling it into an unrelated activity so, you are taking the money from the bank bc point and maybe you are channeling it into gambling purposes or maybe you are creating some shell companies, these are called siphoning of funds. Then, there is something called the overdue or out of order. So, any term loans or bills discounted, if you are not paying back, that it is called overdue and out of order is the over drop facility or the cash credit facility. That’s all about asset modification and provisions made for sub-standard loans and standard assets.



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