March 1, 2005

All State Co-operative Banks and District Central Co-operative Banks

Dear Sir,

At present, banks are required to make provisions on NPAs on a graded scale based on the age of the NPA. However, in respect of NPAs included in ‘doubtful for more than three years’ category, the provisioning requirement on the secured portion remains unchanged at 50%, irrespective of its age, till it is identified as a loss asset.

2. With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances / extent of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPAs. Paragraph 122 of the Annual Policy Statement for the year 2004-05 (copy enclosed) proposes to introduce graded higher provisioning according to the age of NPAs in ‘doubtful for more than three years’ category with effect from March 31, 2005.

For portion of the advance, which is not covered by the realisable value of tangible security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis, provision will be to the extent of 100 per cent as hitherto.

A few illustrations are furnished in Annex for clarity in this regard.

4. The contents of this circular may be placed before the Board of Directors of your bank.

5. All other instructions contained in our circular RPCD.No. BC 155/07.37.02/95-96 dated June 22, 1996 as amended from time to time remain unchanged.

6. Please acknowledge receipt to our concerned Regional Office.

Yours faithfully,

122. At present, banks are required to make provisions on NPAs on a graded scale based on the age of the NPA. However, in respect of ‘doubtful assets for more than three years’, the provisioning requirement on the secured portion remains unchanged at 50 per cent, till it is identified as a loss asset. With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances/extent of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPAs. Accordingly, it is proposed:

• To introduce graded higher provisioning requirement according to the age of NPAs, which are included under ‘doubtful for more than three years’ category, with effect from March 31, 2005."

The outstanding amount as on 31 March 2007: Rs 25,000
Realisable value of security : Rs 20,000
Period for which the advance has remained in 'doubtful' category as on 31 March 2007 : 4 years ( i.e Doubtful > 3 years)

Provisioning requirement:

The outstanding amount as on 31 March 2007: Rs 10,000
Realisable value of security : Rs 8,000
Period for which the advance has remained in 'doubtful' category as on 31 March 2007 : 2.5 years

Provisioning requirement: