AMENDMENTS TO IRAC NORMS FOR BANK BRANCH AUDITORS 2022
The RBI had issued certain clarifications vide its notification dated 12th Nov 2021 with a purpose to more accurately interpret the extant IRAC norms which we must keep in mind while conducting branch audits this time. The gist of the same is reproduced below which are very important from the perspective of deciding the correct date of classifying various loan accounts as SMA or NPA, further down gradation of NPA accounts, ascertaining the quantum of interest reversal, and also creating provisions as per norms:
1. Date of classification as SMA or NPA
It was observed that banks were not classifying accounts as NPA or SMA on correct dates. If an account's 90th-day overdue date fell on suppose 31st March, the account was being classified as NPA on 1st April taking contention that an account can be classified as NPA when it is overdue by more than 90 days. Now, this gimmick is not possible. The account shall become NPA immediately on the running of the day-end process for the 90th day. The overdue position should be cleared before running the day-end process for the 90th day else it will turn NPA on the same date as soon as day-end occurs. In simple words, now the account turns SMA on the 30th day evening and NPA on the 90th day evening if overdue is not cleared before day end process. Similarly, the account will become overdue on the due date itself if the due amount is not paid before running day end process on the due date. Please understand that this is not a new provision. Instead, it is just a clarification of existing IRAC norms. So, these provisions shall be applicable on all loan accounts irrespective of the dates of SMA or NPA.
2. Definition of 'out of order'
Hitherto, there was loophole banks were exploiting in defining 'out of order' in the case of CC/OD facilities. In case of continuously exceeding sanctioned limit or DP, banks were correctly checking 'out of order status every day but 'out of order status for cases wherein credits were not enough to cover the interest charged was being checked only on balance sheet dates. Now, the account will have to be checked each and every day by the system if the credits during the preceding 90 days are enough to cover the interest charged during that period. In other words, a CC/OD account can become NPA on any date (not only the closing date) by reason of inadequate credits in the past 90 days to cover interest debited in that period.
3. Upgradation of NPA accounts only on full payment of arrears
Earlier, some lending institutions were upgrading NPA accounts to standard on payment of the only partial overdue amount or only interest portion (called 'critical amount' in banking). It is clarified that the NPA account can be upgraded only on payment of all arrears of both principal and interest.
In other words, only a critical amount can be paid to avoid the NPA tag till the account actually turns NPA but once the account turns NPA, the entire amount of arrears of both principal and interest is required to be fully paid to come out of NPA status. (This provision is not applicable in case of restructured account. There are separate provisions for such cases)
4. Booking of interest income in case of loans with a moratorium on interest payment
In cases of loans where a moratorium has been granted for repayment of interest, lending institutions may recognize interest income on an accrual basis for accounts that continue to be classified as 'standard' even though such interest has not been actually received by the bank. Further, if loans with a moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the interest accrued during such moratorium period need not be reversed even though not actually realized.
Although these amendments/clarifications have been incorporated by RBI in its latest Master Circular on IRAC norms issued on 1st April 2022, I have discussed them independently to attract your special attention keeping in view their importance in duly complying with IRAC norms while conducting branch audits this year.
5. NPA classification in case of interest arrears on term loans
Earlier, in the case of term loans, the account was classified as NPA only if interest due and charged during any quarter was not fully serviced within 90 days from the end of the quarter. For example- interest charged during April, May, and June was required to be fully paid before 28th September (90 days from 30th June) to avoid becoming NPA. In this way, the borrower could defer payment of interest due for the month of April till 28th September i.e. 5 months which was not in spirit with the IRAC norms. Now, the same has been modified. From now onwards, a term loan account will be classified as NPA if the interest applied at specified rests remains overdue for more than 90 days. In other words, now each amount of interest charged is to be separately paid within 90 days, and interest debited for a calendar quarter can not be clubbed together.
For example- interest charged on 30th April is to be paid by 29th July, that charged on 31st May is to be fully paid by 29th August and that for the month of June is to be fully paid by 28th September. So, now every amount of interest liability will get only 90 days for payment.
This modification will be more relevant in the case of term loans during the moratorium on principal repayment wherein only interest is required to be paid during the moratorium and SMA or NPA status is decided for non-payment of interest only.
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