On Advances Granted
Banks recognise income (such as interest, fees and commission) on accrual basis, i.e., as it is earned. It is an essential condition for accrual of income that it should not be unreasonable to expect its ultimate collection. In view of the significant uncertainty regarding ultimate collection of income arising in respect of non-performing assets, the guidelines require that banks should not recognise income on non-performing assets until it is actually realised. When a credit facility is classified as non-performing for the first time, interest accrued and credited to the income account in the corresponding previous year which has not been realised should be reversed or provided for. Further,
i. Interest income on advances against term deposits, NSCs, IVPs, KVPs and life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
ii. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
iii. If Government guaranteed advances become NPA (subject to what is stated hereunder in respect of Central Govt. guaranteed accounts), the interest on such advances should not be taken to income account unless the interest has been realised.
Credit facilities backed by guarantee of the Central Government, though overdue, may be treated as NPA only when the Government repudiates its guarantee when invoked. Thus, where the guarantee is not invoked/repudiated, the related account cannot be classified as NPA and by implication, the advance is to be treated as “Standard” for the purpose of provisioning. This exemption from classification of such Central Government guaranteed advances as NPA is not for the purpose of recognition of income; and income is to be recognized only based on realisations made.