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RBI has directed the banks to make provisions or set aside money when an account turns bad.
ASSET CLASSIFICATION
1. Standard assets 2. Sub standard asset 3. Doubtful debts
PROVISION REQUIREMENT
Non as the borrower pays his dues regularly 0.40% of the loan amount on time normally . As asset which remained NPA for a period less than or equals to 12 months As asset would be classified as doubtful if it has remained in the sub standard category for a period of 12 months. a) Secured: 25% o/s amt b) Unsecured: 100% o/s amt a) Secured: 40% o/s amt b) Unsecured: 100% o/s amt a) Secured:15% o/s amt. b) Unsecured : 25% on o/s amt & in some case it is 20%.
As per RBI guidelines, NPA is defined as under: Non performing asset (NPA) is a loan or an advance where, interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC), remains overdue for a period of more than 90 days in the case of bills purchased and discounted. The installment of principal or interest there on remains overdue for two crop seasons for short duration crops. The installment of principal or interest there on remains overdue for one crop season for long duration crops. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006. In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Objectives of CAR
The fundamental objective behind the norms is to strengthen the soundness and stability of the banking system.
Tier I Capital
Tier I I Capital
Subordinated debt
1. Tier-I Capital
Capital which is first readily available to protect the unexpected losses is called as Tier-I Capital. It is also termed as Core Capital. Tier-I Capital consists of : Paid-Up Capital. Statutory Reserves. Other Disclosed Free Reserves : Reserves which are not kept side for meeting any specific liability. Capital Reserves : Surplus generated from sale of Capital Asset
2. Tier-II Capital
Capital which is second readily available to protect the unexpected losses is called as Tier-II Capital. Tier-II Capital consists of : Undisclosed Reserves and Paid-Up Capital Perpetual Preference Shares. Revaluation Reserves (at discount of 55%). Hybrid (Debt / Equity) Capital. Subordinated Debt. General Provisions and Loss Reserves
4. Subordinated Debt
These are bonds issued by banks for raising Tier II Capital. They are as follows : They should be fully paid up instruments. They should be unsecured debt. They should be subordinated to the claims of other creditors. This means that the bank's holder's claims for their money will be paid at last in order of preference as compared with the claims of other creditors of the bank. The bonds should not be redeemable at the option of the holders. This means the repayment of bond value will be decided only by the issuing bank.