Banks And Prudential Norms
In recent years we have across the term 'prudential norms' too often particularly in relation to the non-performing assets of the commercial banks. In the light of the existence of huge non-performing asset in the balance sheets of the commercial banks leading to the erosion of their capital base the relevance of these prudential has acquired particular significance.
The main elements of prudential norms are income recognition, assets classification , provisioning for loans and advances and capital adequacy. In keeping with latest practices at the international levels, commercial banks are not supposed to recognize their incomes from non-performing assets on an accrual basis and these are to be booked only when these are actually received.
If the balance sheet of a bank is to reflect the factual and true financial state of affairs of the bank it is pragmatic and desirable to have a system of recognition of income, classification of assets and provisioning for sticky debts on a prudential basis. Banks have been directed not to charge and take interest on non-performing assets to the income account and classify their assets under three broad categories of Standard Assets, Sub-standard Assets, Doubtful Assets and Loss Assets. Taking into account the time-lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in value of security charged to the banks, banks are required to make provision against sub-standard assets, doubtful assets and loss assets.
The prudential accounting norms which were put into place in 1992-93, have been further strengthened over the years. In respect of accounts where there are potential threats of recovery on account of erosion in the value of the security or absence of security and other factorssuch as fraud committed by the borrowers exist, such accounts are to be classified as doubtful or loss assets irrespective of the period to which these remained as non-performing. All the members banks in a consortium are required to classify their advances according to each bank's own record of recovery. Depreciation on securities transferred from the current category to the permanent category has to be immediately provided for. Banks should value the specified government securities under ready forward transactions at market rates on the balance date.
Like it on Facebook, +1 on Google, Tweet it or share this article on other bookmarking websites.