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QNO NPA Case -- Deficiency in Documents Old Course – (N22R)
454.700 TITANIUM CNO—BA.400
CA Prachi was conducting statutory audit of branch of a nationalized bank for the year 2021-22. While
reviewing operations and documents/papers of a borrower enjoying overdraft credit facilities of ₹ 50
crore (availed against security of stocks and book debts), following observations were jotted down by
her: -
(i) The balance in overdraft credit facility as on 31st March,2022 was ₹ 55.65 crore. The balance in
account exceeded sanctioned limit during the whole month of March 2022.
(ii) As per terms of sanction letter, stock/book debt statements were required to be submitted
monthly. Latest available stock/book debt statement for the month of February, 2022 showed
drawing power of ₹ 48.50 crore only. However, stock/book debt statements of previous
months showed adequate drawing power.
(iii) Stock audit of borrower was also conducted during the year by one of empanelled stock
auditors of the bank. Stock audit report dated 31st December,2021 placed on the record
showed adequate drawing power in the account. However, it has commented adversely on the
declining turnover of borrower in year 2021 -22(till the date of stock audit report) as compared
to proportionate turnover in preceding year.
(iv) The renewal of overdraft facilities was due on 20th October,2021. The account was short
renewed by competent authority for a period of 3 months pending submission of complete
papers.
However, borrower has not submitted complete renewal papers till 31st March,2022. There is a request
letter from borrower on record stating that valuation report of a property located at a faraway location
was taking time. The branch has classified the account as ‘Standard Asset’. Considering above, CA Prachi
is in dilemma relating to proper classification of above advance. Guide her.
Answer The borrower was enjoying overdraft credit facilities of ₹ 50 crore against security of stocks and debts.
Further, though latest available stock statement for the month of February, 2022 showed inadequate
drawing power, there was adequate drawing power available throughout the year. Stock audit report
dated 31.12.2021 also reflected adequate drawing power. Hence, it shows that borrower had adequate
drawing power during the year.
Further, comment on declining sales is of general informative value to management for making credit
decisions.
The fact of over drawings in account during the month of March, 2022 and inadequate drawing power in a
month are in nature of temporary deficiencies and do not require account to be classified as NPA in
accordance with asset classification and provisioning norms of RBI.
RBI instructions lay down that ordinarily credit limits need to be reviewed not later than three months
from the due date. As per Guidance note on Audit of Banks, in case of constraints such as non-availability
of financial statements and other data from the borrowers, the branch should furnish evidence to show
that renewal/ review of credit limits is underway and would be completed soon. In any case, delay beyond
six months is not considered desirable as a general discipline. Hence, an account where the credit limits
have not been reviewed/ renewed within 180 days from the due date will be treated as
NPA.
It would be pertinent to note that the counting of 180 days would be required to be done from the date of
original due date for renewal and not from the date of expiry of short reviews / technical reviews. In the
instant case, the original date of renewal was 20th October, 2021 and period of 180 days has still not
expired as on balance sheet date.
Keeping in view all above factors, CA Prachi should accept classification of account as ‘Standard Asset’
made by branch.
QNO Sale of NPA Old Course – (M15E M18E, N20E, SM21, N22M)
455.000 TITANIUM CNO—BA.400 New Course – (SM23)
CA K have been doing audit of branch of LUD Bank Ltd. The principal business of the branch is lending
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