Overdue Restructured Loan: NPA Classification and Provisioning
An NBFC-ICC with ₹2,800 crore assets has a ₹48 crore term loan to a bus operator. The loan was restructured in March 2024 with a 9-month moratorium, and the account is now 96 days overdue as on 30 June 2025. The borrower has paid nothing since January. The relationship manager has classified the account as 'standard' because the moratorium is 'part of the original terms' and because the borrower has pledged two buses worth ₹22 crore. Interest income of ₹1.1 crore for Q1 FY2026 has been recognised on accrual. The company's standard-asset provisioning is 0.25%. Its gross NPA ratio is 1.9% and CRAR 16.4%. The CFO wants to avoid a provisioning hit before the quarter-end board meeting and asks whether the loan can be shown as standard if the buses are revalued.
1. What is the correct asset classification and provisioning for this account as on 30 June 2025? Show the treatment of interest income.
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Classification: substandard NPA.
- A term loan becomes an NPA when it is overdue for more than 90 days. The account is 96 days overdue, so it is an NPA.
- The account was restructured in March 2024. A restructured account is classified as substandard unless it has demonstrated satisfactory performance for the required period. The borrower has paid nothing since January, so there is no basis to upgrade it.
Provisioning:
- Substandard asset provisioning is generally 10% of the outstanding for a secured exposure.
- Provision = 10% × ₹48 crore = ₹4.8 crore.
- The 0.25% standard-asset rate does not apply once the account is an NPA.
Interest income:
- Income on an NPA must not be recognised on accrual. The ₹1.1 crore accrued for Q1 FY2026 should be reversed or not recognised; income should be recognised only when received.
- The collateral value of ₹22 crore affects expected recovery, not the NPA classification. It does not justify continuing accrual.
2. Can the loan be kept as standard because the moratorium was contractual, or because the buses can be revalued? Explain the principle.
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No. Both arguments are wrong in principle.
Moratorium argument: the classification test is the borrower's actual record of recovery, not the label used in the loan agreement. A moratorium is a concession; it does not convert non-payment into performance. Once the account is overdue for more than 90 days, it is an NPA. Calling the moratorium 'part of the original terms' does not change the fact that the borrower has paid nothing since January.
Collateral argument: security is relevant to recovery and to the provisioning rate for a secured exposure, but it does not cure an NPA. Revaluing the buses does not create a repayment record. Using a revised valuation to keep the account standard would misstate the loan book and understate provisions.
The CFO's proposal would therefore be a regulatory and accounting misrepresentation. The audit committee should reject it, and the account should be reported as an NPA with the required provision.
3. What governance and reporting failures does this reveal, and what should the audit committee do?
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The case reveals several failures:
- Relationship-manager override: a business officer has classified an NPA as standard despite 96 days of non-payment.
- Income recognition override: interest has been accrued on an NPA.
- Provisioning understatement: the account is carried at 0.25% instead of 10%, understating provisions by roughly ₹4.56 crore (₹4.8 crore minus ₹0.24 crore).
- Pre-quarter-end pressure: the CFO is seeking a valuation-driven workaround before the board meeting, which is a control and integrity issue.
The audit committee should:
- direct correction of the classification, provisioning, and interest income before the accounts are finalised;
- require a review of all restructured accounts and overdue accounts above a threshold;
- review the delegation matrix and MIS escalation so that relationship managers cannot determine final classification;
- fix accountability for the override and consider whether the statutory auditor and RBI need to be informed;
- minute the decision and require a follow-up report.
A board that allows provisioning to be managed by revaluation is not just understating a number; it is undermining the audit and risk framework.