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Adoption of 90 days� norm for recognition of loan impairment �
Application of interest at monthly rests
DBOD
No. Dir. BC. 73/13.03.00/2001-02 dated 9th March 2002
Please
refer to paragraph 1.A.b of our circular DBOD.No.BP.BC. 116/21.04.048/00-01
dated May 2, 2001 wherein banks have been, inter-alia, advised that with
a view to moving towards international best practices and ensure greater
transparency in repayment of loans, banks should adopt 90 days� norm for
recognition of loan impairment from the year ending March 31, 2004. As a
facilitating measure, banks should move over to charging of interest at monthly
rests by April 1, 2002. In this connection, some of the banks have approached us
for clarification on issues such as application of interest on agricultural
advances at monthly intervals, options available for applying interest at longer
rests etc. and requested us to issue detailed operational guidelines on
documentation formalities.
2. As you may be aware, in terms of paragraph 1
of our Directive DBOD. No. Dir. BC. 106/13.03.00/2000-01 dated April 19, 2001
read with paragraph 1.1.1 and 1.1.2 of our Master Circular DBOD No. Dir. BC.
06/13.07.01/2001-02 dated August 9, 2001, banks should charge interest at
specified rates on loans/ advances/ cash credits/ overdrafts or any other
financial accommodation granted/ provided/ renewed by them at quarterly or
longer rests. The matter was therefore examined by us in consultation with
Indian Banks� Association (IBA). It has now been decided that in partial
modification of paragraph 1 of our Directive DBOD.No. Dir.BC. 106/13.03.00/
2000-01 dated April 19, 2001 and paragraph 1.1.1 and 1.1.2 of our Master
Circular DBOD No. Dir. BC. 06/13.07.01/2001-02 dated August 9, 2001 and with
effect from April 1, 2002, banks may move over to charging of interest on
loans/advances at monthly rests subject to following conditions:
i. Interest at monthly rests will not be
applicable to agricultural advances and banks will continue to follow the
existing practice of charging/ compounding of interest on agricultural advances
linked to crop seasons.
ii. Application
of interest on monthly rests will be restricted to Cash Credit and Overdraft
accounts only. At the time of changing over to monthly rests, banks may obtain
consent letter/supplemental agreement from the borrowers for the purpose of
documentation.
iii.
In the case of loans of longer/ fixed tenor, banks may move over to
application of interest at monthly rests at the time of review or renewal of
such loan accounts.
iv. In
the case of new term loans and other loans of longer/ fixed tenor, banks may
apply interest at monthly rests.
3. An amending Directive DBOD. No. Dir. BC.
72/13.03.00/2001-02 dated March 9, 2002 is enclosed.
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