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Trichur Branch of SIRC of ICAI Bank Audit

Trichur Branch of SIRC of ICAI Bank Audit. NPA & LFAR Bank Branch Audit. CA Niranjan Joshi 14.03.2019 Trichur. Restriction on Disclosure and Use of Data

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Trichur Branch of SIRC of ICAI Bank Audit

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  1. Trichur Branch of SIRC of ICAIBank Audit NPA & LFAR Bank Branch Audit CA Niranjan Joshi 14.03.2019 Trichur Restriction on Disclosure and Use of Data The data in this document contains trade secrets and confidential or proprietary information of my firm, the disclosure of which would provide a competitive advantage to others. As a result, this document shall not be disclosed, used or duplicated, in whole or in part, for any purpose. The data subject to this restriction are contained in the entire document.

  2. Disclaimer These are my personal views and can not be construed to be the views of the ICAI or my firm. No representations or warranties are made by the Trichur Branch of SIRC of ICAI with regard to this presentation. These views do not and shall not be considered as a professional advice. This presentation should not be reproduced in part or in whole, in any manner or form, without our written permission. CA Niranjan Joshi

  3. Agenda Prudential Norms of IRAC and Provisioning pertaining to Advances Long Form Audit Report CA Niranjan Joshi

  4. Objective (1.2) Policy of IR should be objective & based on record of recovery rather than on any subjective considerations. Classification of assets on the basis of objective criteria, which ensure a uniform & consistent application of the norms. Provisioning made on the basis of the classification of assets based on the period for which the asset has remained non-performing & the availability of security & the realisable value thereof. CA Niranjan Joshi

  5. Asset Classification PERFORMING ASSET (STANDARD ASSET) Account is performing & does not carry more than normal risk attached to the business. NON-PERFORMING ASSET (NPA) (SUB STANDARD, DOUBTFUL, LOSS) Asset ceases to generate income. Higher risk than normal risk attached to business. Non performing as per various criteria for various types of loans. CA Niranjan Joshi

  6. Identification of NPA Term Loans (2.1.2) Interest and/or Installment remains overdue for a period of more than 90 days Exceptions – Moratorium, Schematic Loans such as Housing / education / Staff Loans etc. Bills Purchased / Discounted Bill Purchased / Discounted remains overdue for a period of more than 90 days CA Niranjan Joshi

  7. Identification of NPA Agricultural Advances (4.2.13) Short Duration Crop - Interest or installments remains overdue for two crop seasons (which are not long duration crops) Long Duration Crop - Interest or installments remains overdue for one crop seasons (season longer than 1 year) How to find about duration of crops? * CA Niranjan Joshi

  8. Identification of NPA These norms applicable only to Farm Credit extended to agricultural activities as listed at paragraph III(1) of RBI Circular on Priority Sector Lending – Targets and Classifications FIDD.CO.Plan.BC.54/04.09.01/2014-15 dated April 23, 2015. Farm Credit should include: A. Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data of such loans], directly engaged in Agriculture only. This will include: CA Niranjan Joshi

  9. Identification of NPA (i) Crop loans to farmers, which will include traditional / non-traditional plantations and horticulture. (ii) Medium and long-term loans to farmers for agriculture (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activitiesundertaken in the farm.) (iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. (iv) Loans to farmers up to 50 lakh against pledge/ hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months. (v) Loans to distressed farmers indebted to non-institutional lenders. (vi) Loans to farmers under the Kisan Credit Card Scheme. (vii) Loans to small and marginal farmers for purchase of land for agricultural purposes. CA Niranjan Joshi

  10. Identification of NPA B. Loans to corporate farmers, farmers' producer organizations / companies of individual farmers, partnership firms and co-operatives of farmers directly engaged in Agriculture only up to an aggregate limit of 2 crore per borrower. This will include: (i) Crop loans to farmers which will include traditional / non-traditional plantations and horticulture. (ii) Medium and long-term loans to farmers for agriculture (e.g. purchase of agricultural implements and machinery, loans for irrigation and other developmental activities undertaken in the farm.) (iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting, sorting, grading and transporting of their own farm produce. (iv) Loans up to 50 lakh against pledge/hypothecation of agricultural produce (including warehouse receipts) for a period not exceeding 12 months. CA Niranjan Joshi

  11. Identification of NPA Derivative Transactions Overdue receivables representing positive mark to market value of derivative contract remaining unpaid for a period of 90 days from specified due date Liquidity Facility Remains outstanding for more than 90 days in respect of securitisation transaction. Credit Card Dues If minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the due date. CA Niranjan Joshi

  12. Identification of NPA Cash Credit / Overdraft (2.2) The account is ‘out of order’ if: Outstanding Balance remains continuously in excess of sanctioned limit/drawing power for 90 days. or Outstanding Balance less than limit/DP, but there are no credits continuously for 90 days as on the date of Balance Sheet or Credits in the account are not sufficient to cover interest debited during the same period. CA Niranjan Joshi

  13. Income Recognition Policy of income recognition has to be objective and based on record of recovery. Banks should not charge and take to income account interest on any NPA. (3.1.1) Interest on Advances against Term Deposits, NSC, KVP, IVP and Life Policies may be taken to income account on due date, provided adequate margin is available in the account. (3.1.2) CA Niranjan Joshi

  14. Income Recognition Fees and commissions earned by banks as a result of renegotiation and reschedulement of outstanding debts should be recognised on accrual basis over the period of time covered by extension of credit. (3.1.3) If any advance becomes NPA, the entire interest accrued and credited to income in past periods should be reversed if the same is not realised. (3.2.1) CA Niranjan Joshi

  15. Income Recognition In respect of NPA, fees, commission or similar income that have accrued, should cease to accrue for past periods, if uncollected. (3.2.2) Interest realised on NPA may be taken to income provided credits are not out of fresh/additional credit facility sanctioned to borrower. (3.3.1) CA Niranjan Joshi

  16. Income Recognition In absence of clear agreement between bank and borrower for the purpose of appropriation of recoveries in NPA (interest or principal), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. (3.3.2) On account turning NPA, Banks should reverse the interest already charged and not collected by debiting P&L Account and stop further application of interest. (3.4) CA Niranjan Joshi

  17. Classification Norms CA Niranjan Joshi

  18. Classification Norms Availability of security or net worth should not be considered while treating advance as NPA (4.2.3) Temporary deficiencies (4.2.4) Outstanding Balance in account based on the DP calculated from stock statements older than 3 months would be deemed as irregular & if such irregular drawings are permitted for a period of 90 days, account needs to be classified as NPA. (TD) Non-renewal/ Non – regularisation of regular/ adhoc limit within 180 days from the due date.(TD) CA Niranjan Joshi

  19. Classification Norms Upgradation (4.2.5) 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 NPA and may be classified as ‘Standard’ account. For restructured accounts refer para 12.2 and 15.2 of master circular. CA Niranjan Joshi

  20. Classification Norms Accounts regularised near about the BS Date (4.2.6) Care should be taken that a solitary or few credits in the account made at/near the balance sheet date extinguishing the overdue interest/principal is not the only criteria for classifying the asset as standard. CA Niranjan Joshi

  21. Classification Norms Classification Borrower wise and not facility wise (Qua borrower) (4.2.7) All facilities granted to a borrower shall be treated as NPA & not only that facility which has become irregular. Consortium Advances (4.2.8) • Member banks shall classify the accounts according to their own record of recovery. • Bank needs to arrange to get their share of recovery or obtain an express consent from the Lead Bank. CA Niranjan Joshi

  22. Classification Norms Erosion in Value of Security (4.2.9) Where realisable value of security is less than 50% of the value assessed, account to be straightaway classified as Doubtful Asset. Where realisable value of security is less than 10% of outstanding balance, account to be straightaway classified as Loss Asset. CA Niranjan Joshi

  23. Classification Norms Advances to Primary Agricultural Credit Society (PACS) and Farmers Service Societies (FSS) ceded to commercial banks. (4.2.10) Qua borrower concept not to apply. Only facility which is overdue will be classified as NPA. CA Niranjan Joshi

  24. Classification Norms Advances against TD/KVP/NSC/IVP/LIP etc. These advances need not be treated as NPA provided adequate margin is available. Advances against Gold loans, government securities are not covered in this criteria. (4.2.11) Central Government guaranteed advance to be classified as NPA only if Government repudiates the guarantee when invoked. (4.2.14) CA Niranjan Joshi

  25. Project Loan – Asset Classification CA Niranjan Joshi

  26. Project under Implementation CA Niranjan Joshi

  27. Provisioning Norms CA Niranjan Joshi

  28. Write Off – NPA’s Banks may write off accounts at HO Level even though the advances are still outstanding at branches. (8.4) It is necessary that provision is made as per the classification accorded to the respective accounts . The banks should either make full provision as per the guidelines or write off such advances & claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. (8.3) CA Niranjan Joshi

  29. Part B – Guidelines for Restructuring Four Broad Catagories: Advances extended to Industrial Units Advances extended to IU under CDR Advances to SME All other advances CDR mechanism available only to borrowers engaged in industrial activities. Eligibility Any account classified under standard, sub standard and doubtful categories. CA Niranjan Joshi

  30. Eligibility Criteria for Restructuring Restructuring cannot be done retrospectively. While the restructuring proposal is under consideration, usual asset classification norms would continue to apply. Asset Classification status on date of approval of restructuring relevant to decide the asset classification status after such restructuring Restructuring should be subject to customer Application / consent for terms and conditions. Financial viability should be established and there is reasonable certainty of repayment. Borrowers indulging in frauds & malfeasance are ineligible. BIFR cases are not eligible without their express approval. CA Niranjan Joshi

  31. Restructuring of Advances • Standard Asset would get reclassified as sub standard immediately • Account which is already NPA would continue to have the same classification. • Additional finance would be treated as standard up to a period of one year. • All restructured accounts, classified as NPA upon restructuring would be eligible for upgradation after observation of satisfactory performance during the specified period. (Annex 5 (viii) – during 1year it should not be out of order for more than 90 days and no overdue at the end) CA Niranjan Joshi

  32. Restructuring – Provisioning Norms • Provision on restructured advance as per extant provisioning norms. • Standard restructured advances will attract higher provision for first 2 years. • NPA restructured advances when upgraded to standard attract higher provision in first year. • Diminution in fair value is an economic loss to bank & needs additional provision on each BS date. • For advances below Rs.1 crore, 5% of total exposure can be provided notionally for such diminution in faire value of advance. CA Niranjan Joshi

  33. Restructuring of Advances Special Regulatory Treatment for asset classification. • Not available to Consumer & Personnel Advances, Advances classified as Capital Market Exposure, Advances classified as Commercial Real Estate Exposure. Incentive for quick implementation of package (up to 31.03.2015 as per 20.2.3) The asset classification status may be restored if the approved package is implemented : • Within in 120 days from the date of approval under CDR mechanism • Within 120 days from the date of receipt of application by Bank in other cases. CA Niranjan Joshi

  34. Restructuring of Advances Asset classification benefits Standard advance will not be downgraded upon restructuring if following conditions are satisfied. • Dues of the bank are fully secured by tangible security (except SSI borrower with outstanding upto Rs.25 lacs & infrastructure projects) • Unit becomes viable in 8 years, if it is engaged in infrastructure activities and in 5 years in case of other units. • Repayment period including moratorium does not exceed 15 years for infrastructure & 10 years for other projects (10 years ceiling won’t apply to restructured Home Loans). CA Niranjan Joshi

  35. Restructuring of Advances • Promoters sacrifice and additional funds brought by them should be a higher of 20% of bank’s sacrifice or 2% of restructured debt. • Prior to 30.05.2013 If promoters face genuine difficulty then 50% upfront and the balance within one year • The restructuring is not ‘repeated restructuring’ During the specified period the asset classification of sub standard / doubtful accounts will not deteriorate, if satisfactory performance is demonstrated. CA Niranjan Joshi

  36. Part C – Early Recognition of Financial Distress Joint Lenders Forum (JLF) and Corrective Action Plan (CAP) Applicable for Consortium and Multiple Banking Advances read with Restructuring guidelines. Before an account becomes NPA, banks have to identify incipient stress in the account by creating three (3) Categories under Special Mention Accounts CA Niranjan Joshi

  37. Early Recognition of Financial Distress RBI Circular No. DBS.CO.OSMOS/ B.C./4/ 33.04.006/ 2002-2003 dated 12.09.2012 CA Niranjan Joshi

  38. Early Recognition of Financial Distress RBI to set up Central Repository of Information on Large Credits (CRILC) Banks to report credit information of borrowers. Banks are advised that as soon as an account is reported by any of the lenders to CRILC as SMA-2, they should mandatorily form a committee to be called JLF if the aggregate exposure (AE) of lenders in that account is Rs. 1000 million & above. Lenders also have the option of forming a JLF even when the AE in an account is less than Rs.1000 million &/or when the account is reported as SMA-0 or SMA-1. CA Niranjan Joshi

  39. Early Recognition of Financial Distress The JLF may explore various options to resolve the stress in the account to arrive at an early and feasible solution to preserve the economic value of the underlying assets as well as the lenders’ loans. Banks to report credit information of borrowers. Options under Corrective Action Plan (CAP) - Rectification - Restructuring - Recovery CA Niranjan Joshi

  40. Early Recognition of Financial Distress Accelerated Provisioning Required In cases where banks fail to report SMA status of the accounts to CRILC or resort to methods with the intent to conceal the actual status of the accounts or evergreen the account, banks will be subjected to accelerated provisioning for these accounts and/or other supervisory actions as deemed appropriate by RBI. These guidelines have become effective from April 1, 2014. CA Niranjan Joshi

  41. Early Recognition of Financial Distress CA Niranjan Joshi

  42. Restructuring Schemes Resolution of stressed assets to recognize financial distress, ensure fair recovery for lenders and investors Joint Lender’s Forum (JLF) 5/25 restructuring scheme Strategic Debt Restructuring (SDR) Scheme for Sustainable Structuring of Stressed assets (S4A) CA Niranjan Joshi

  43. Flexible Restructuring of Long Term Project Loans(5:25 Framework) July 2014 Project Finance – Asset Liability Mismatch Economic Life of a Project- 25-30 years Repayment Period (Including Construction & Moratorium)- 10-15 years Strains the project viability ; constrains the equity generation capability- Result is stress in project loan servicing Bank request – Longer amortization period (25 years) with periodic refinancing (every 5 years), which would help in the following ways Ensuring Long term project viability by smoothening stress initially Minimize the need for restructuring Upward rating revision- Lower capital requirement for banks CA Niranjan Joshi

  44. S4A (Scheme for Sustainable Structuring of Stressed Assets) Banks represented for allowing more time for resolution than that allowed under SDR Eligible accounts Project should have commenced operations Aggregate banking exposure > Rs. 500 crore Successful Debt Sustainability test Debt sustainability – JLF / consortium conduct TEV – Liabilities payable over existing loan tenor; Sustainable debt (PART A) >50% of funded liabilities Options:- Promoter continues to hold control Promoter replaced by a new promoter under : SDR OR Outside SDR Lenders acquire majority shareholding through debt to equity conversion under SDR and Allow current management to continue Hand over management to another agency CA Niranjan Joshi

  45. RBI Circular dated 12.02.2018 Resolution of Stressed Assets – Revised Framework Enactment of Insolvency and Bankruptcy Code, 2016 (IBC) Early identification and reporting of stress SMA – 0 1-30 days SMA – 1 31-60 days SMA – 2 61-90 days Central Repository of information on Large Credits (CRILC) CA Niranjan Joshi

  46. RBI Circular dated 12.02.2018 All borrowers above Rs. 50 Million (Above Rs. 5 Crores) to be reported on weekly basis on every reporting Friday. First Such Report on 23.02.2018 CRILC Monthly Report w.e.f. 01.04.2018 Implementation of Resolution Plan Board Approved policies by Banks Resolution Plan to involve any actions / plans / reorganisation CA Niranjan Joshi

  47. RBI Circular dated 12.02.2018 Implementation Conditions for RP RP shall be deemed to be implemented if following conditions are met: • Borrower is no longer in default with any of the lenders • If resolution involves restructuring (all documentation is completed and new capital structure, changes in terms and conditions gets reflected in books of borrower and lender Independent Credit Evaluation (ICE) by CRA for large accounts Rs. 1 Billion and above (Rs. 100 Crores) 2 such ICE in case of accounts above Rs. 5 billion (Rs. 500 Crores) CA Niranjan Joshi

  48. RBI Circular dated 12.02.2018 Timelines for Large Accounts to be referred under IBC Accounts with aggregate exposure at Rs. 20 Billion (Rs. 2000 Crores) and above, on or after 01.03.2018 (Reference Date) including those where resolution may have been initiated under existing schemes as well as restructured standard assets which are currently in specified period, RP shall be implemented • If in default as on the reference date, then 180 days from reference date • If in default after reference date, then 180 days from date of first such default CA Niranjan Joshi

  49. RBI Circular dated 12.02.2018 All other prudential norms as per Master Circular on IRAC dated 01.07.2015 applies as amended from time to time. All earlier restructuring in any nature is withdrawn immediately (Revitalising Distressed Assets, CDR, Flexible Restructuring of Exisiting Long Term Project Loans, SDR, S4A, Change in ownership outside SDR). All accounts, including such accounts where any of the schemes have been invoked but not yet implemented shall be governed by revised framework. CA Niranjan Joshi

  50. RBI Circular dated 12.02.2018 Definition of Restructure Restructuring is an act in which a lender, for economic or legal reasons relating to the borrowers financial difficulty, grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances/securities, which would generally include, amongst others, alteration of repayment period/repayable amount/ the amount of instalments/ rate of interest/ roll over of credit facilities/ sanction of additional credit facility/ enhancement of existing credit limits/ compromise settlements where time for payment of settlement amount exceeds 3 months. CA Niranjan Joshi

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