aurangabad branch of

Aurangabad Branch of Western India Regional Council

The Institute of Chartered Accountants of IndiaSeminar on Bank Branch Audit

Non-Performing Assets & IRAC Norms

CA Prakash P. KulkarniMarch 25, 2018

• NPAs – some concepts• Important aspects• Relaxation to MSME sector• Case studies

Presentation Outline

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NPAs - Concepts

• Master Circular dated July 01, 2015 on IRAC Norms • Master Direction – RBI (Relief Measures by Banks in Areas

affected by natural calamities) Directions, 2017 dated July 03, 2017• Relief for MSME Borrowers registered under Goods & Services

Tax (GST) (February 7, 2018)• Master Direction - Lending to Micro, Small & Medium

Enterprises (MSME) Sector (July 24, 2017)• Resolution of Stressed Asset – Revised Framework (February

12, 2018) • Discontinuation of LoC / LoU (March 13, 2018)

RBI Directions / Circulars

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§ Classification of assetsü Standardü Sub-standardü Doubtfulü Loss

§Overdue§Out of Order§ Temporary deficiencies§ Inherent Deficiencies§ Potential threat of recovery

Terminology

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§ Solitary credit§ Secured - Unsecured loans§ Intangible assets§ Erosion in value§ Projects under implementation üDate of Completion’ (DC)üDate of Commencement of Commercial Operations’ (DCCO)

§Restructuring – computation of sacrifice§Order of recovery (for appropriation)

Terminology

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Terminology

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Categories Particulars SMA 0 Not overdue for more than 30 days,

but showing signs of incipient stress SMA 1 Principal / Interest overdue

between 30-60 days SMA 2 Principal / Interest overdue

between 60-90 days

• Standard Assets ü Agricultural and SMEs Sectors – 0.25%ü Commercial Real Estate (CRE) Section – 1.00% ü CRE – Residential Housing Project – 0.75%ü Others – 0.40%ü Housing Loan during teaser rate period – 2.00%

Provisioning Norms

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• Sub-standard Assets ü Secured portion of Loans – 15%ü Unsecured portion of loans – 25%ü Infrastructure loans – 20% ü backed by escrow facility with first charge

Provisioning Norms

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• Doubtful Assets

§ Loss Assets – 100 %

Provisioning Norms

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Period of Loan Secured Portion UnsecuredUp to 1 year 25% 100% 1to 3 years 40% 100% More than 3 years 100% 100%

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NPAs – Important aspects

§ CBS parameters for IRAC norms – RBI circulars§ Customer-id of borrowers – duplicate ids§ Correctness of data in CBS

ü Limitü Rate of Interestü Moratoriumü Instalment due dateü Interest due dateü Stock statement – value

§ Correctness & punctuality of submission of stock statements

Auditors should remember

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§ Correct computation of DP§ Value of security for collaterals§ Comparison of NPA statement last year & current year§Missing accounts - Recovery or Upgradation§Recovery after balance sheet date (till completion of audit)§ First time NPAs – correct date of NPA, backdated NPAs§ LCs & BGs invoked & paid debited to other a/cs§ Amounts debited to suspense a/cs§Return of cheques, subsequently debited to a/c§ Same amount debited & credited to term loan a/c on same date§ Ever-greening of the accounts

Auditors should remember

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Relaxations to MSME Sector

• The borrower is covered under MSME.ü Registration not granted by any Govt. Authority / Agency under MSME.ü Certification given by the independent Chartered Accountant to be relied upon.ü Classification based on the criteria of investment.

• Borrower registered under GST on or before January 31, 2018.• Aggregate exposure, Fund-based & Non-fund-based facilities, of all

banks and NBFCs does not exceed Rs. 250 million (Rs. 25 crore) as onJanuary 31, 2018.• MSME : Investment in Plant & MachineryüMicro : Upto Rs. 25 lakhü Small : Over Rs. 25 lakh upto Rs. 5 croreüMedium : Over Rs. 5 crore upto Rs. 10 crore

Conditions given in the RBI Circular

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§ Information about total borrowings available from:üThe latest proposal notes prepared for review / renewal of the limits

to the borrower.ü Latest financial statements.

§ Aggregate Exposure of Rs. 250 Million may be interpreted as Sanctioned limits or Outstanding balances, whichever is higher.


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• The borrower’s account should be standard as on August 31, 2017. ü Verification of ledger accounts & overdue statements.ü There can be overdues as on August 31, 2017, but should be less than 90 days.ü As on August 31, 2017, the dues up to June 2, 2017 must have been serviced.

Otherwise the account will not be eligible for relaxation.• Overdues as on September 1, 2017 and amounts due between

September 1, 2017 and January 31, 2018 are paid not later than 180days from their respective original due dates.ü Verification : through the system or by referring to the ledger accounts.

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§ Two aspects of the criteria:ü Dues as on June 3, 2017 should be serviced not later than November

30, 2017 and so on.ü All dues up to October 2, 2017 should be cleared up to March 31, 2018

and that too within 180 days from the original due date. ü As on March 31, 2018, there can be overdues in the account from

October 3, 2017 onwards.• Provision of 5% on the outstanding exposure for which

relaxation is sought in terms of the RBI circular.ü Provisions for standard assets made by Central / Head Office.üAuditor may put a suitable note in his branch report / below the closing

return related to MSME accounts at the branch for which relaxation issought.

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§ Relaxation granted for classification of the advance, not for unrealisedinterest.

§ Unrealised Interest for more than 90 days to be reversed or matchingprovision to be made.

§ Verification: the working provided by the branch for unrealised interestin such accounts

§ Reversal at the branch or HO - To ensure that such unrealised interestis properly reflected in the closing return.

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Reversal / matching provision for interest not realised beyond 90 days.

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NPAs – Case studies

• ABC Ltd. is enjoying both fund based - Cash Credit of Rs. 300 lakhs and non-fund based limits - Letters of Credit (Margin @ 25% in the form of TDR) • On 27 Dec’17, one of the bill under L/C of Rs. 40 Lakh was devolved

and paid by the Bank to the beneficiary. Net amount of Rs. 30 lakh debited “Suspense A/c”• Open entry in “Suspense A/c” cleared on 26 Mar’18 - debiting CC A/c.• Outstanding in CC account overdrawn occasionally, not rendering the

A/c “NPA”• O/s Balance in CC taken together with the amount receivable against

the devolvement (parked in separate a/c till 26 Mar’18 in excess of the sanction limit continuously for more than 90 days.• Hence, the a/c needs to be classified as NPA.

Case study

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§Housing loan of Rs. 30 Lakh granted to Mr. X.§ Total repayment period 120 months by way of EMI of Rs.

32,000 commencing 1 month after the date of disbursement. § Cheque received against recovery of overdues returned unpaid.§ CBS treated debit of clearing return as forced debits towards

charges.§ Amount credited treated as recovery in overdue statement &

overdues shown as less than 60 days as on 31 Mar’18.§ Account need to be classified as NPA for non-recovery of EMI

resulting in overdues for more than 90 days.

Case study

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• XYZ Pvt. Ltd. is a manufacturing concern, with investment in plant and machinery of Rs. 324 lakh & qualifies to be a small enterprise as per notification dated 29th September 2006 issued by Ministry of Small Scale Industries. •Holds a valid registration under GST from the date of applicability of GST. • Term loan of Rs. 180 Lakhs availed from bank.• Term loan to be repaid by monthly instalment of Rs. 3 Lakh plus interest. • As on 31 Aug’17, the account was standard as the overdues were

below 90 days (from 30th June 2017 onwards).

Case study

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• The amount due on 1st October 2017 not served within 180 days from the due date.• The benefit of the RBI Circular will not be available & the account

needs to be classified as NPA. • Had the amount due on 1st October 2017 been paid on or before 30th

March 2018, the account could have been retained in standard category by availing the benefit of the RBI Circular.

Case study

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