Asset Classification-2 , Banking Fundamentals to Know for students.

Blog on Banking Technology for Common Customer

                                                Click Here

Asset Classification- 2 

Asset Classification Norms

Banks classify recoverable loans as assets of different types according to how they are being paid back. Assets or loans into four types: 

Standard Assets, Substandard Assets, Doubtful Assets, Loss Assets.

An asset is either NPA (Non- Performing Asset) or non-NPA. While the Standard Assets are not NPAs, all three remaining assets are grouped under the NPA category. In other words, the NPA category has three sub-categories: Substandard, Doubtful and Loss assets.

 

GENERAL STUDIES

Standard Assets: Paid back regularly    - 

*Give their interest and Principal installments on time.

*Called performing assets as they generate regular interest to the     Bank and return the due Principal.

*Banks can earn profits.

*Term Loan Interest and/or installment of principal remains   overdue beyond 90 days *Overdraft/Cash Credit above Remains ‘out or order’ as indicated

*Bill Purchased/discounted Remains overdue beyond 90 days

* Crop Loans (short duration crops) Instalments of principal or interest remains overdue for 2 crops

*Crop Loans (Long duration crops) Instalments of principal or interest remains overdue for 1 crop

Substandard Assets

*For more than 90 days but less than or equal to 12 months

* It is considered NPA

*Doubtful Asset

*Sub-standard category for a period of 12 months

*It is considered NPA and  Called doubtful assets, since their recovery seems doubtful on the basis of the facts, conditions, and values of the security for the loan

Loss Assets Considerable period of time

* Loss has been identified by the bank or auditors, or the RBI inspection

*The amount has not been written off wholly. Loss assets are considered not collectible. 

*They are of little value as assets.

*However, there may be some recovery value in the long term, in some cases.

Asset Classification

Banks classify recoverable loans as assets of different types according to how they are being paid back. Assets or loans into four types: 

Standard Assets

Substandard Assets

Doubtful Assets 

Loss Assets

An asset is either NPA (Non- Performing Asset) or non-NPA. While the Standard Assets are not NPAs, all three remaining assets are grouped under NPA category. In other words, the NPA category has three sub-categories: Substandard, Doubtful and Loss assets.

Asset Classification-1 , Banking Fundamentals to Know for students.

 Blog on Banking Technology for Common Customer

                                                Click Here

Asset Classification-1 

Non-performing asset

Definition: A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days from the end of a particular quarter. In simple terms, an asset is tagged as non-performing when it ceases to generate income for the lender.

Description: Banks are required to classify NPAs further into Substandard, Doubtful and Loss of assets.

1. Standard Asset. If the borrower regularly pays his dues regularly and on time; the bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.

HIGH-LEVEL REASONING

2. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.

3. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

4. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

How assets are classified?

Assets of a bank are classified in terms of its repayment status. Standard assets, substandard assets, doubtful assets, and loss assets are classifications of asset quality. For a bank, classification of assets into different categories should be done taking into account credit weaknesses and the extent of dependence on collateral security for the realization of dues.

What is a standard asset?

Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

What is a substandard asset?

A sub­standard asset would be one, which has remained NPA for a period less than or equal to 12 months.  

What is a doubtful asset?

An asset would be classified as doubtful if it has remained in the sub­standard category for a period of more than 12 months. 

What is a loss asset?

An asset that is an NPA for a period of more than 36 months is treated as a lost asset. Such asset has been identified by the bank or internal or external auditors or by the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered no collectible.

Provisions

For SA's a bank has to maintain a general provision of .4% for all type of Loans and Advances, SA's are the Loans in which dues are paid regularly by the borrower.

Sub-Standard Asset: (from 90days to 12months)-provision of 15% of Secured Loans and 25% for Unsecured Loans on the outstanding amount.

Doubtful Assets:(1year to 3years)-provision of 25% for Secured Loan,100% for Unsecured Loan up to 1 year and  Provision of 40% for Secured Loan,100% for Unsecured Loan for 1-3 years and Provision of 100% for Secured Loan & Unsecured Loan for more than 3 years.

Loss Asset: If the Loan is not paid even after 3 years of being classified as Sub-Standard Assets, it may be identified as Loss Asset. In this case, a 100 % provision is required.

Priority Sector Lending-3, Banking Fundamentals to Know for students.

Priority Sector Lending - 3          Banking Technology for Common Customer
                                                                         Click Here
Educational Loan

All basis expenses like costs of books, tuition fees, lodging expenses, caution deposits and the like are covered under the educational loan that can be availed up to a maximum limit of Rs. 10 lakhs. Repayment period for loans up to Rs.7.50 lakh is 10 years and for loans above Rs.7.50 lakh up to 15 years.

1.    There is no limit for education loan for inland and abroad studies. However, for inland studies loans up to Rs.10 lakhs will be classified by the Bankers as a priority sector and above Rs. 10 lakhs it would be at a higher rate of interest.

2.    In respect of studies abroad, the loans up to Rs. 20 lakhs will be classified by the Bankers as priority sector and above Rs. 20 lakhs it would be at a higher rate of interest. The higher rate of interest concept varies from bank to bank.

3.    Education loans above Rs.7.5 lakhs will be provided only if tangible securities like a mortgage of property is provided.

Currently, loans to individuals for up to Rs 28 lakh in metropolitan centers and Rs 20 lakh in other centers can be classified under priority sector, provided that the cost of dwelling unit does not exceed Rs 35 lakh and Rs 25 lakh respectively.

Renewable Energy

REASONING

As per RBI’s notification, banks can now provide loans up to a limit of Rs 150 million to borrowers for solar, biomass, wind, and micro-hydel power generation, and also for renewable energy-based public utilities like street lighting systems and remote village electrification. For individual households, the loan limit has been set to Rs 1 million per borrower.

*For cultivating more than one crop in a year: The limit will be fixed based on the crops cultivated according to the cropping pattern for the first year with an additional 10% of the limit towards the cost escalation/ increase in the scale of finance for every successive year.

*The Govt. doubled the pecuniary limit to Rs 20 lakh for filing loan recovery application in the Debt Recovery Tribunals (DRT) by banks and financial institutions.

*Sarfaesi Act.

The provisions of this Act are applicable only for 1.NPA loans with outstanding above Rs. 1.00 lac. 2.NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

Conflict resolution is conceptualized as the methods and processes involved in facilitating the peaceful ending for conflict and retribution. Committed group members attempt to resolve group conflicts by actively communicating information about their conflicting motives or ideologies to the rest of the group (e.g., intentions; reasons for holding certain beliefs) and by engaging in collective negotiation. Dimensions of resolution typically parallel the dimensions of conflict in the way the conflict is processed. The term conflict resolution may also be used interchangeably with dispute resolution, where arbitration and litigation processes are critically involved. The concept of conflict resolution can be thought to encompass the use of nonviolent resistance measures by conflicted parties in an attempt to promote effective resolution.

1. Which of the following categories under priority sector?
   A. Export Credit
   B. Agriculture
   C. Social Infrastructure
   D. Renewable Energy
   E. All of these
2. Which of the following categories under priority sector?
   A. Micro, Small and Medium Enterprises
   B. Education
   C. Housing
   D. All of these
   E. None of these
3. Bank loans up to a limit of ______ per borrower for building social infrastructure under priority sector.
   A. Rs. 1 crore
   B. Rs. 2 crore
   C. Rs. 3 crore
   D. Rs. 5 crore
   E. None of these
4. Bank loans up to a limit of _____ to borrowers for purposes like solar based power generators under priority sector.
   A. Rs. 10 crore
   B. Rs. 18 crore
   C. Rs. 15 crore
   D. Rs. 20 crore
   E. None of these
5. For individual households, the loan limit is for renewable energy under priority sector ______ per borrower.
   A. Rs. 5 lakh
   B. Rs. 10 lakh
   C. Rs. 15 lakh
   D. Rs. 20 lakh
   E. None of these
6. Bank loans up to ____ per unit to Micro and Small Enterprises under priority sector.
   A. Rs. 1 crore
   B. Rs. 2 crore
   C. Rs. 3 crore
   D. Rs. 5 crore
   E. None of these
7. Bank loans up to ____ per unit to Medium Enterprises under priority sector.
   A. Rs. 10 crore
   B. Rs. 18 crore
   C. Rs. 15 crore
   D. Rs. 20 crore
   E. None of these
8. Loans to individuals for educational purposes including vocational courses up to _______ irrespective of the sanctioned amount is eligible for classification under priority sector.
   A. Rs. 5 lakh
   B. Rs. 10 lakh
   C. Rs. 15 lakh
   D. Rs. 20 lakh
   E. None of these
9. Loans to individuals up to ______ in metropolitan centers (with the population of ten lakh and above) under priority sector.
   A. Rs. 25 lakh
   B. Rs. 18 lakh
   C. Rs. 15 lakh
   D. Rs. 28 lakh
   E. None of these
10. Loans up to _______ in other centers for purchase/construction of a dwelling unit per family under priority sector.
    A. Rs. 20 lakh
    B. Rs. 18 lakh
    C. Rs. 15 lakh
    D. Rs. 28 lakh
    E. None of these

11. Kisan Cards are issued for_______________

a.short term only

b.for term loans only

c.for both the short term and term loan

d.for meeting domestic expenses only

12. Under farm mechanisation scheme, loan is given for________________

i.              providing irrigation facilities

ii.             cultivation expenses

iii.           purchase of farm equipments

iv.            for digging wells

13. Advances to weaker sections "interalia" include _________________

i.Individual women beneficiaries up to Rs 2 lakh per borrower

ii.Distressed persons other than farmers, with loan amount not exceeding Rs 2 lakh per borrower to prepay their debt to non-institutional lenders

iii.Overdrafts up to Rs 5000 under PradhanMantri Jan DhanYojana accounts

iv.Artisans, village and cottage industries where individual credit limits do not exceed Rs 2 lakh

14. The scheduled commercial banks are expected to enlarge credit to the priority sector and ensure that priority sector advances constitute _______________ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher.

i.eighteen percent

ii.forty percent

iii.twelve percent

iv.twenty five percent

15. Educational loans should include only loans and advances granted to individuals for educational purposes up to Rs ________ for studies in India, to be classified as a priority sector.

i.seven and a half lakh ii .ten lakh        iii.fifteen lakh            iv.twenty lakh

16. Housing Loans granted to individuals up to Rs __________ for construction of house (excluding loans granted by banks to their employees) at non-urban centers are treated as priority sector advances.

i.five lakhs

ii.ten lakhs

iii.twenty lakhs

iv.fifteen lakhs

17. Under MSME, loans in the manufacturing sector for micro-enterprises do not exceed Rs ________ lakh

a.50

b.30

c.25

d.20

18. Under MSME, loans in the service sector for micro-enterprises do not exceed Rs ________ lakh

i.5

ii.15

iii.10

iv.20

19. Under Renewable Energy, for the individual household, the loan limit will be Rs ________lakh per borrower.

i.20

ii.10

iii.15

iv.5

20. No loan related and adhoc service charges/inspection charges should be levied on priority, sector loans up to Rs 25000/-

True                                                     False

21. Who issues priority sector lending guidelines in India?

A.    Basel Committee on Banking Supervision (BCBS)

B.    Reserve Bank of India (RBI)

C.    Bank of International Settlement (BIS)

D.    Department of Financial Services

22. Priority Sector Lending guidelines are not applicable to which out of the following type of banks?

A.    Small Finance Banks

B.    Foreign banks

C.    Scheduled Commercial Banks

D.    None of these

23. Which among the following sectors does not fall under Priority Sector as Priority Sector Lending guidelines in India?

A.    Automobile

B.    Agriculture

C.    Housing

D.    Education

24.Up to what amount of Education Loan is eligible to be classified as Priority Sector?

A.    Rs 5 lakh

B.    Rs 7.5 lakh

C.    Rs 10 lakh (for education in India)

D.    Rs 20 lakh (for education I Aboard)

25. What is the total priority sector target for Domestic scheduled commercial banks (excluding Regional Rural Banks and Small Finance Banks) as a percentage of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher?

A.    25%

B.    30%

C.    35%

D.    40%

 Bold options are the correct answer.

Priority Sector Lending-2 , Banking Fundamentals to Know for students.

Priority Sector Lending - 2

WEAKER SECTION

Under the priority sector, the weaker sections that are included are as follows:

1.Small and marginal farmers who have land holdings of 5 acres and less,

 2.landless laborers,

3. tenant farmers and sharecroppers,

4. artisans,

 5.village and cottage industries where the credit limits for individuals do not exceed Rs. 50000,

6.beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY),

7.Scheduled castes and schedule tribes beneficiaries of DRI scheme,

 8.beneficiaries under Swarnjayanti Shahari Rozgar Yojana (SJSRY) and

9.beneficiaries under the Scheme of Liberation and Rehabilitation Scavengers (SLRS) Advance to Self-Help Groups (SHGs).

Target -10% of ANBC (Adjusted Net Banking Credit)

RBI Guidelines on weaker sections: The overall target set by the RBI for the priority sector lending is 40% of the adjusted net bank credit (ANBC) out of which 18% is fixed for the agriculture sector and 10% for weaker sections of the society.

Differential Rate of Interest (DRI)

REASONING

Introduced in 1972, this the scheme is being implemented by all-Indian Scheduled Commercial Banks.

Objective: The scheme was to provide bank finance at a concessional rate of interest of 4 percent p.a. to the weaker sections of the community for engaging in productive and gainful activities. In this way, they could improve their economic conditions.

Area of Operations: The scheme is being implemented throughout the country by all-Indian Scheduled Commercial Banks.

Target Group/Eligibility Criteria: The income ceiling for eligibility is an annual income of Rs. 7200 per family in urban or semi-urban areas and Rs. 6400 per family in rural areas. The size of landholding must not exceed one acre of irrigated land and 2.5 acres of dry land. However, this landholding criterion is not applicable to SCs/STs. The important categories of borrowers under the scheme are SCs/STs and others engaged on a small scale, in agriculture and/or allied activities, people who collect or process forest products, people physically engaged in the cottage and rural industries, etc.

The banks are required to lend under the Scheme, at least one percent of their aggregate advances as at the end of the previous year.

Two-thirds of the total DRI advances must be routed through the banks’ rural and semi-urban branches.

Loan Amount: The maximum assistance per beneficiary has been fixed at Rs. 6500 for productive purposes. In addition to this, physically handicapped persons can avail of assistance to the extent of Rs. 5000 (maximum) per beneficiary for acquiring aids, appliances, equipment, provided they are eligible for assistance under the scheme. Similarly, members of SC/STs satisfying the income criteria of the scheme can also avail of housing loan up to Rs. 5000 per beneficiary over and above the loan of Rs. 6500 available under the scheme.

Margin Money: This scheme has no margin money prescribed.

Capital Subsidy/Interest: Under this scheme no capital subsidy is available. The rate of interest to be charged on loans is 4 percent p.a.

Security: Under this scheme, no collateral security/third party guarantee is required. The assets created out of the loan amount would only be hypothecated to the banks. 
Repayment: The repayment period cannot exceed the period of five years including a grace period of two years.

Reservation/Preference: The banks are required to make sure that at least 40 percent of their DRI advances flow to SC/STs.

Agricultural Gold Loan:

Purpose:- Loan  to enable farmers to meet their short-term agricultural credit needs. An existing the account holder can avail this loan within an hour producing land tax receipt along with passbook and gold.

Eligibility: Any person engaged in agriculture or allied activities as well as persons engaged in activities permitted by RBI to be classified under agriculture

a. Cash Credit / Overdraft:  like KCC, it is a running account for a period of 3 years, subject to review at annual intervals.

b.D demand Loan / Term Loan: the repayment period of the loan should be fixed so as to coincide with the harvesting and marketing season. The total period will not generally exceed one year from the disbursement of the loan in the case of short-term loan/production credit and 36 months in other cases

Documents:  1.Proof of Identity 2.Passport size photograph 3.Address Proof 4. Proof of Agricultural land/property- Tax receipts 5.Demand Promissory Note 6. Loan agreement 7.Gold Loan pledge.