Introduction:- A well organized and efficient banking system is a pre-requisite for economic growth. Banks play an important role in the functioning of organized money market. in order to meet the banking needs of various sections of the society, a large network of bank branches has been established. There are four type of banking institutions.
a- Commercial Banks
b- Regional Rural Banks
c- Co-operative Banks
d- Development Banks (Term lending institutions)
Principal Enactment of Banking Functions: There is an elaborate framework governing the functioning of banks in India. The principal enactment of which governs the functioning of various banks are as under:- a- Banking Regulation Act 1949
b- Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 c- Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980 d- State Bank of India Act, 1955
e- Regional Rural Bank Act, 1976
f- Companies Act, 1956
g- Co- operative Societies Act, 1912 or the relevant state Co-operative societies Act
Besides the above enactment the provisions of Reserve Bank of India Act, 1934 also effect the functioning of banks. The Act gives wide powers to Reserve Bank of India to give directions to banks, such directions also have considerable effect on the functioning of banks.
Classification of Assets:- The assets may be classified in two types a- Performing asset
b- Non- Performing Asset (NPA)
W.e.f. 31st march 2004 NPA is a loan or an advance where,
1- Interest and/ or Installment of principal remain over due for a period of more than 90 days in respect of term loan. 2- The account remain out of order for a period of more than 90 days in respect of an over draft/ cash credit. 3- The bill remains over due for a period of more than 90 days in the case of bills purchased and discounted. 4- Interest and/ or Installment of principal remain over due for two harvest seasons but for a period not exceeding 2 years, in case of an advance granted for agricultural purpose and in respect of advances granted for agricultural purpose w.e.f. 30th September 2004, a loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains over due for two crops season and loan granted for long duration crops will be treated as NPA, if the installment of principal and interest thereon remain overdue for one crop seasons, and 5- Any amount to be received remains overdue for a period of more than 90 days in respect of other account.
Reserve Bank of India has laid down norms for classification of assets and provisioning norms for NPA, however certain exceptions to these norms are discussed below:-
Temporary deficiencies e.g. non availability of current drawing power due to non-receipt of latest stock statement, temporary delay in renewal of limit on due date etc. Natural calamities, where in the wake of natural calamities short term agricultural loans are converted into long term or there is rescheduling of repayment period or fresh short term loans are sanctioned, the term loans as well as fresh short term loan may be treated as current dues and need not to be classified as NPA. Facilities Backed by Central Government Guarantee:- credit facilities backed by guarantee of the Central Government though overdue should be treated as NPA only when government repudiates its guarantee when invoked (this exception is only for the purpose of asset classification and provisioning and not for the purpose of recognition of income.)
The Reserve Bank of India has issued guidelines to be followed by all scheduled commercial banks excluding regional rural banks for income recognition, asset classification provisioning and other related matters.Conceptually speaking a credit facility become NPA when it ceases to generate income for bank. The...