``The committee has formed the features of NPA norms and we have to run some test cases before we submit the report to AMFI,'' said Niamatullah. The report will work on two aspects -- spell out details on how to identify NPAs in mutual funds and how much a fund should provide for when an asset turns non-performing. ``While you can make 100 per cent provision for interest income, we are also considering whether some provisioning has to made for the investments made on the principal amount,'' he added.

While Sebi guidelines of 1996 state that provisioning has to be made if interest is unpaid for one year, the committee is likely to bring down the time frame to 3 months. ``NPAs will have to be provided for if interest is unpaid for one quarter or two quarters, depending on whether a fund is open-ended or closed-ended,'' said Niamatullah.

The provisioning of NPAs is particularly important in the case of open-end income funds, where unitholders invest and redeem continuously. ``For instance, a company pays you interest income on September 30 and you have booked it as income. Now, even after 90 days, you do not get the interest payment and you make a provision for the same, thus bringing down assets under mangement. Thus, this is a loss for existing investors and those who entered at a higher price within these three months and a gain for smart investors who made an exit during this period,'' said the head of a private-sector asset management company. The issue is also important for closed-end income funds which offer repurchase on a daily basis.

Another important issue that has so far been not looked into is providing for prudential provisioning once the debt paper of a corporate is downgraded. Given the current spate of downgrades of corporate debt by credit rating agencies, norms on prudential provisioning call for immediate attention.

``The issue is should we start prudential provisioning immediately when an instrument is downgraded or wait for the instrument to go into the default category or actually default. The guidelines are silent on this issue even as companies are rapidly slipping,'' said a fund manager. `And since there is hardly any liquidity in the country even for triple A rated paper, leave alone junk bonds, you cannot sell these instruments,'' he added.