The Part-Payment That Did Not Cure the NPA

Apply the 90-day overdue norm facility-wise, not borrower-wise. The term loan instalment has been overdue for 95 days, so the term loan is a non-performing asset (NPA) and, because it has been NPA for less than 12 months, it is a sub-standard asset. The CC account is overdue for 68 days, which places it in SMA-2, not NPA. The fact that the same borrower holds both facilities does not automatically make the CC an NPA, though the bank must assess the borrower's overall repayment capacity and consider classifying the CC as NPA if the account is effectively out of order.

On income recognition, interest on the term loan should not be recognised in the profit and loss account until it is actually realised. Any interest already charged but not received must be reversed or kept in a memorandum account. Interest on the CC can continue to be recognised only while the CC remains a standard/SMA account and is serviced; once it becomes NPA, the same stop-accrual rule applies. The branch's practice of charging interest on the CC while not recognising interest on the term loan is acceptable only if the CC is genuinely performing. The key point is that part-payment of Rs 40 lakh does not erase the earlier 95-day overdue status for the term loan on 31 March.

No. An NPA is upgraded only when the entire arrears of principal and interest are cleared and the account then performs satisfactorily for the prescribed period, generally 90 days. A part-payment of Rs 40 lakh against a Rs 1.2 crore instalment leaves substantial arrears and does not reset the clock. Upgrading now would overstate income and understate provisioning, and would misstate the bank's CRAR, which is already below the minimum.

The fresh Rs 2 crore CC is equally problematic if its real purpose is to help the borrower pay overdues or to keep the account alive. That is evergreening. A new facility can be considered only on a fresh appraisal of genuine business needs, with a credible repayment source, satisfactory stock and book-debt statements, and no diversion to clear past dues. The board credit committee should record the correct classification, direct recovery action, and consider whether restructuring under the applicable RBI framework is feasible. Restructuring is not a route to avoid provisioning; it carries its own asset-classification and provisioning consequences.

The minute should record: the date-wise overdue position; the term loan as sub-standard and the CC as SMA-2; the decision not to upgrade or to sanction a fresh limit for repayment of overdues; the provisioning made; the recovery plan and review dates; and the reasons for rejecting the branch recommendation. It should also note that interest on the term loan has been suspended and that any unrealised interest has been reversed.

The bank must report the correct classification in its statutory returns and financial statements. The board should review the account monthly until arrears are cleared. If the borrower is offered restructuring, the board must approve it under a board-approved policy, verify eligibility, and provide for the account as required. The audit committee should test whether any fresh lending to this borrower is being used to regularise the old account. Finally, the board should disclose the NPA position and provisioning to the members in the annual report, with a clear recovery strategy rather than a cosmetic upgrade.