Advances constitute greatest amount in the total assets of a bank ’s balance sheet and therefore, audit of advances becomes the most important component of bank audit. case an advance account is classified as NPA (Non- Performing Asset), primary responsibility of making adequate provision for diminution in value of advance is that of the bank management and the statutory auditors. It is, therefore, imperative for the statutory auditors, to have thorough knowledge of the norms prescribed by the Reserve Bank of India (RBI) in Master Circular – ’Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances (IRAC Norms). The author in this article explains those aspects of the Master Circular regarding NPAs which are most relevant during the bank branch audit.
The prudential norms are formulated on the basis of objective criteria rather than on any subjective consideration. This has brought in uniform and consistent application of the norms and greater transparency in published accounts of banks. The latest Master Circular No. DBOD.
No. BP.BC.9/21.04.048/2014-15 dated 1st July, 2014 issued by the RBI contains IRAC norms which are applicable for the statutory audit of banks for the year ending 31s,March, 2015. For the first time, the RBI has introduced new frame work for revitalisation of distressed assets in the above circular.
Audit of NPA would basically involve identification of an account as NPA, its correct classification, income recognition, provisioning, if an account is restructured and compliance of various conditions as enumerated in the Master Circular, etc.
- Types of Assets
Standard Asset: An account is considered as standard asset when it is not non-performing and does not carry more than normal risk attached to the business.
Non-Performing Asset (NPA): An asset becomes NPA when it ceases to generate income for the bank. This would mean that an account would be classified as NPA on the basis of record of recovery rather than security charged in favour of the bank in respect of such account. Thus, an account would become NPA if interest charged to that particular borrower is not realised within the prescribed time frame despite the account being fully secured.
- Identification of Account as NPA
The RBI has laid down undermentioned criteria for classification of various types of advances as NPA which is based on record of recovery:
- Term Loan: Interest and/or instalment of principal remain overdue for a period of more than 90 days.
It is very important to note here that as per para
- of the Master Circular, an account would be classified as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. For example, interest is charged on 30th November, 2014 in a term loan account. Now, if it is not serviced within 90 days from 31st December, 2014, then term loan account would become NPA, not otherwise.
- Overdraft/Cash Credit: If an account remains out of order, it would become NPA. For this purpose, an account would be treated as ‘out of order’ if:
- The outstanding balance remains continuously in excess of the sanctioned
limit/drawing power for 90 days or more, or
- Even if the outstanding balance in the account is less than the sanctioned limit/ drawing power, there are no credits in the account continuously for 90 days as on the date of the balance sheet, or
- Credits in the account are not sufficient to cover interest debited during the same period.
As on 31st March, 2015, if any of the above criteria is satisfied, the account would be classified as NPA. Auditor should verify stock statement to check the correctness of drawing power and whether the same is calculated in accordance with the approved policy of bank. Auditor should not assume sanctioned limit to be the drawing power. There may be instances where drawing power would be less than the sanctioned limit. For example, sanctioned limit of an account may be ^25 lakh but the drawing power of the account may not necessarily be ?25 lakh and it could less than that. A CC/OD account which is classified as standard may get classified as NPA because of an error in calculation of drawing power.
- Bills Purchased/Discounted: If the bill
purchased or discounted remains overdue for a period of more than 90 days from its due date.
- Agricultural Advances: A loan granted for-
- Short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.
- Long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.
For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and NPA date would depend on crop cycle, which is
A credit card account will be treated as NPA, if the minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the next statement date. The gap between two statements should not be more than a month.