Bank of baroda

Asset Classification and Provisioning
In April 1992, the RBI issued formal guidelines on income recognition, asset classification, provisioning standards and
valuation of investments applicable to banks, applicable from the financial year 1992-93, which are revised from time to
time.
As per these guidelines, the basis of treating various credit facilities as non-performing are set forth below.
Non-Performing Assets
An advance is a non-performing asset where:
interest and/or installment of principal remained overdue for a period of more than 90 days in respect of a term
loan;
the account remained “out-of-order” for a period of more than 90 days in respect of an overdraft or cash credit (If
the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power or 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, then such accounts are treated as “out of order”);
the bill remained overdue for a period of more than 90 days in case of bills purchased and discounted;
if the interest and/or principal remained overdue for two harvest seasons but for a period not exceeding two half-

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BANK OF BARODA
years in the case of an advance granted for agricultural purposes. With effect from September 30, 2004, a loan
granted for short duration crops will be treated as a non-performing asset, if the installment of principal or interest
thereon remains overdue for two crop seasons. With effect from September 30, 2004, a loan granted for long
duration crops will be treated as a non-performing asset, if the installment of principal or interest thereon remains
overdue for one crop season. (Crops with crop season longer than one year are long duration crops, and crops,
which are not long duration crops are treated as short duration crops.)
any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
Once the account has been classified as a non-performing asset, the unrealized interest and other income already
debited to the account is derecognised and further interest is not recognised or credited to the income account unless
collected.
Asset Classification
Non-performing assets are classified as described below:
Sub-Standard Assets: Assets that are non-performing assets for a period not exceeding 18 months. With effect from
March 31, 2005, a sub-standard asset is one, which has remained NPA for a period less than or equal to 12
months.
Doubtful Assets: Assets that are non-performing assets for more than 18 months. With effect from March 31, 2005,
an asset is classified as doubtful if it remains in the sub-standard category for 12 months.
Loss Assets: Assets on which losses have been identified by the bank or internal or external auditors or the RBI
inspection but the amount has not been written off fully.
There are separate guidelines for projects under implementation, which are based on the achievement of financial
closure and the date of approval of the project financing.
The RBI has separate guidelines for restructured assets under the corporate debt restructuring mechanism and under
other mechanisms. A fully secured standard asset can be restructured by reschedulement of principal repayments and/ or
the interest element, but must be separately disclosed as a restructured asset. The amount of sacrifice, if any, in the
element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice
involved. Similar guidelines apply to sub-standard assets, and to doubtful assets, in the case of restructuring of assets
under the corporate debt restructuring mechanism. The sub-standard accounts which have been subjected to restructuring,
whether in respect of principal instalment or interest amount, are eligible to be upgraded to the standard category only
after the specified period, i.e. a period of one year after the date when first payment of interest or of principal, whichever
is earlier, falls due, subject to satisfactory performance during the period.
Provisioning and Write-Offs
Provisions are based on guidelines specific to the classification of the assets. The following guidelines apply to the
various asset classifications:
Standard Assets: A general provision of 0.25% is required.
Sub-Standard Assets: A general provision of 10.0% on total outstanding should be made. The unsecured exposures
which are identified as sub-standard would attract additional provision of 10%, i.e., a total of 20% on the outstanding
balance.
Doubtful Assets: A 100.0% provision/ write-off of the unsecured portion of advances, which are not covered by
realizable value of the security. In cases where there is a secured portion of the asset, depending upon the period
for which the asset remains doubtful, a 20.0% to 100.0% provision is required to be made against the secured
asset as follows:
Up to one year: 20.0% provision;
One to three years: 30.0% provision; and
More than three years:
In respect of outstanding stock of non-performing assets as on March 31, 2004: 50.0% provision, which has become 60%
with effect from March 31, 2005, 75% with effect from March 31, 2006 and 100% with effect from March 31, 2007.

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In respect of assets, that have been doubtful for over three years on or after April 1, 2004, the provision has been raised
to 100% with effect from March 31, 2005.
Loss Assets: The entire asset is required to be written off or provided for.
While the provisions indicated above are mandatory, banks are encouraged to make higher provisions over and above
the mandatory level.
Regulations relating to Making Loans
The provisions of the Banking Regulation Act govern the making of loans by banks in India. The RBI issues directions
covering the loan activities of banks. Some of the major guidelines of RBI, which are now in effect, are as follows:
The RBI has prescribed norms for bank lending to non-bank financial companies and financing of public sector
disinvestment.
The banks should charge interest on loans/advances/cash credits/overdrafts or any other financial accommodation
granted/provided/renewed by them or discount usance bills in accordance with the directives on interest rates on
advances issued by RBI from time to time. Banks are free to determine their own lending rates but each bank must
declare its benchmark prime lending rate as approved by its board of directors. Benchmark prime lending rate is
determined on the basis of various parameters, which inter alia, include cost of funds, operating expenses, capital
charge and profit margin. Each bank should also indicate the maximum spread over the benchmark prime lending
rate for all credit exposures other than retail loans over Rs. 200,000. The interest charged by banks on advances up
to Rs. 200,000 to any one entity (other than most retail loans) must not exceed the benchmark prime lending rate.
Banks are also given freedom to lend at a rate below the prime lending rate in respect of creditworthy borrowers
and exporters on the basis of a transparent and objective policy approved by their boards. Interest rates for certain
categories of advances are regulated by the RBI. Banks are also free to stipulate lending rates without reference to
their own benchmark prime lending rates in respect of certain specified categories of loans.
In terms of Section 20(1) of the Banking Regulation Act, a bank cannot grant any loans and advances on the
security of its own shares. A bank is also prohibited from entering into any commitment for granting any loans or
advances to or on behalf of any of its directors, or any firm in which any of its directors is interested as partner,
manager, employee or guarantor, or any company (not being a subsidiary of the banking company or a company
registered under Section 25 of the Companies Act, or a Government company) of which, or the subsidiary or the
holding company of which any of the directors of the bank is a director, managing agent, manager, employee or
guarantor or in which he holds substantial interest, or any individual in respect of whom any of its directors is a
partner or guarantor. There are certain exemptions in this regard as the explanation to the Section provides that
‘loans or advances’ shall not include any transaction which the RBI may specify by general or special order as not
being a loan or advance for the purpose of such Section.
Legislation introduced in the Indian Parliament to amend the Banking Regulation Act has proposed to prohibit lending to
relatives of directors and to non-subsidiary companies that are under the same management as the banking company,
joint ventures, associates or the holding company of the banking company.
There are guidelines on loans secured by shares, debentures and bonds, money market mutual funds, fixed deposits
receipts issued by other banks, gold/silver bullion etc. in respect of amount, margin requirement and purpose.