Page 318 - CA Inter Audit PARAM

CA Ravi Taori
non-performing assets until it is actually realized. When a credit facility is classified as non-
performing for the first time, interest accrued and credited to the income account in the
corresponding previous year which has not been realized should be reversed or provided for.
This will apply to Government guaranteed accounts also.

 Memorandum Account:
On an account turning NPA, banks should reverse the interest already charged and not collected by
debiting Profit and Loss account and stop further application of interest. However, banks may continue
to record such accrued I n t e r e s t in a Memorandum account in their books for control purposes. For
the purpose of computing Gross Advances, interest recorded in the Memorandum account should not
be taken into account.
 In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed or provided for with respect to past
periods, if uncollected.
 Further, in case of banks which have wrongly recognized income in the past should reverse
the interest if it was recognized as income during the current year or make a provision for
an equivalent amount if it was recognized as income in the previous year(s).
 Furthermore, the auditor should enquire if there are any large debits in the Interest Income
account that have not been explained. It should be enquired is there are any communications
from borrowers pointing out differences in Interest charge, and whether action as justified
has been taken in this regard.

 Interest on advances against Term Deposits, National Savings Certificates (NSCs), Indira Vikas Patras
(IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date,
provided adequate margin is available in the accounts.

QNO NPA (Agriculture) Old Course -- (N18E/N22M/M22M)
BA.07 NPA (Erosion)
Bhaskar CNO - BA.240/ BA.260
Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March,
2018. In the audit planning, the partner of Ramjial & Co., observed that the allotted branches are
predominantly based in rural areas and major portion of the advances were for agricultural purpose.”
Now he needs your assistance on the following points so as to incorporate them in the audit plan :

(i) for determination of NPA norms for agricultural advances
(ii) for accounts where there is erosion in the value of security /frauds committed by the borrowers.
OR
When is an agricultural advance considered as non performing as per the RBI guidelines?
Answer  Agricultural Advances:
A loan granted for short duration crops will be treated as NPA, if the instalment of principal or
interest thereon remains overdue for two crop seasons and, a loan granted for long duration crops
will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one
crop season.

As per the guidelines, “long duration” crops would be crops with crop season longer than one year
and crops, which are not “long duration” crops would be treated as “short duration” crops. The
crop season for each crop, which means the period up to harvesting of the crops raised, would be as
determined by the State Level Bankers Committee in each State. Depending upon the duration of
crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural
term loans availed of by him.

 Erosion in Value of Securities/ Frauds Committed by Borrowers:
In respect of accounts where there are potential threats for recovery on account of erosion in the
value of security or non-availability of security and existence of other factors such as frauds
committed by borrowers, such accounts need not go through the stages of asset classification. In
such cases, the asset should be straightaway classified as doubtful or loss asset, as appropriate.
Further,
 Erosion in the value of securities by more than 50% of the value assessed by the bank or
accepted by RBI inspection team at the time of last inspection, as the case may be, would
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