Page 274 - CA Final PARAM Digital Book.

on the issue which were brought to your notice by your Audit Manager.
OR

The bank is a consortium member of Cash Credit Facilities of Rs 50 crores to X Ltd. Bank's own share is Rs
10 crores only. During the last two quarters against a debit of Rs 1.75 crores towards interest the credits
in X Ltd.’s account are to the tune of Rs 1.25 crores only. Based on the certificate of lead bank, the bank
has classified the account of X Ltd as performing.
Answer Part I -- Relevant Laws
▪ As per Classification Norms Related to NPAs
Part II -- Requirements of Relevant Laws
➢ Sometimes, several banks form a group (the 'consortium') under the leadership of a 'lead bank'
to make advance to a large customer on same conditions and security with proportionate rights.
In such cases, each bank may classify the advance given by it according to its own experience of
recovery and other factors.
Part III – Case Discussion
➢ The bank is a consortium member of cash credit facilities of Rs 50 crores to X Ltd. Bank's own share
is Rs 10 crores only. During the last two quarters against a debit of Rs 1.75 crores towards interest,
the credits in X Ltd.’s account are to the tune of Rs 1.25 crores only.
Part IV – Conclusion
➢ Since in the last two quarters, the amount remains outstanding and, thus, interest amount should
be reversed. This is despite the certificate of lead bank to classify that the account as performing.
Accordingly, the amount should be shown as non-performing asset.
Author’s Note
• The conclusion part of the answer says, “Interest Should be reversed”. The reason why interest
should be reversed here and the logic behind it.
o In case of consortium every bank has to see at its own status of recovery, so as to determine
whether loan is NPA or not. Even if lead bank is getting money that is not going to affect our
status. Our status depends on our recovery and not what is happening with the lead bank or
other banks. Here in consortium every bank has to see their own recovery for the purpose of
NPA. If bank not getting money it is a NPA and if it is NPA then interest should be reversed.

QNO NPA (Multiple Cases) Old Course – (N21R)
454.500 TITANIUM CNO—BA.400
Gupta & Co. has been appointed as a statutory auditor of TCB Bank Ltd., a private sector bank, registered
with RBI. Mr. Kaival Gupta, the engagement partner, while performing the audit as per the checklist,
noted down the following points, which would be part of the audit queries, as tabulated below:

Sr. No. Queries
1 Interest on State Government Guaranteed advance has been taken to income even though
such advance has remained overdue for more than 90 days.
2 There is an account for which an ad hoc limit has not been reviewed for 180 days from the
date of such ad hoc sanction and such account has been treated as a performing asset in the
books.

3 One of the NPAs was sold for a value higher than the net book value. Profit was not
recognized but the excess provision in respect of the same has been reversed.
4 In case of one of the accounts, an additional temporary limit has been sanctioned for 25% of
the existing limit and for 120 days tenure.
5 On verification of outstanding forward exchange contracts, the ‘net position’ in respect
of one of the foreign currencies was not squared and was uncovered by a substantial
amount.
You are required to provide the reasons due to which such queries would have been raised by Mr. Kaival
and describe the actions that may be taken by the person responsible on behalf of TCB Bank Ltd. for
solving such queries.
Answer Sr. No. Reason for such Query Action that may be taken in response to the
query
1 A State Government Guaranteed advance Interest income recognized on such advance
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