Three Accounts at the 31 March Cut-off
At its 31 March 2026 cut-off, the Kolar branch of a public sector bank must classify three accounts. Account A is an MSME term loan, outstanding ₹2.00 crore, secured by hypothecation of machinery with a realisable value of ₹0.90 crore (last valuation 14 months old). The instalments due on 20 September and 20 December 2025 are unpaid, and ₹18 lakh of interest for the third and fourth quarters has already been taken to income. Account B is a crop loan of ₹50 lakh to a farmer growing a short-duration pulse, repayable after the first harvest on 31 January 2026; only one crop season has been completed and the next crop season ends on 30 June 2026. Account C is a gold loan of ₹8 lakh overdue by 60 days; the pledged gold is worth ₹16 lakh, and the manager proposes no NPA classification because the security fully covers the dues. On 30 March the borrower in Account A offers to deposit ₹10 lakh and asks for the account to be shown as standard. The bank's risk-weighted assets are ₹18,000 crore and the tax rate is 25 per cent.
1. Classify each of the three accounts as on 31 March 2026 and compute the provision required for Account A.
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Account A - NPA, substandard. The instalments have been unpaid since 20 September 2025, far beyond 90 days at the cut-off, so the account is an NPA and, being within the first 12 months, a substandard asset. Provisioning follows the split between the realisable value of security and the uncovered balance: 15 per cent on the secured portion and 25 per cent on the unsecured portion.
- Secured portion: ₹0.90 crore × 15% = ₹13.50 lakh
- Unsecured portion: (₹2.00 crore − ₹0.90 crore) × 25% = ₹27.50 lakh
- Provision = ₹41.00 lakh
The valuation is 14 months old. Fixed-asset valuations are generally accepted for up to three years, but the branch should confirm the machinery is unencumbered and realisable at ₹0.90 crore, because a lower realisable value pushes more of the exposure into the 25 per cent bucket.
Account B - not an NPA. For loans to agriculture the 90-day rule is replaced by the crop-season rule: a short-duration crop loan becomes an NPA only when the instalment or interest remains unpaid for two crop seasons. One season ended on 31 January 2026; the second ends on 30 June 2026. The account is standard on 31 March 2026, but should be flagged for review on 1 July 2026.
Account C - not an NPA, but for the wrong reason. It is only 60 days overdue, so the 90-day test is not met. The manager's reasoning is dangerous: NPA status depends on the record of recovery, not on the value of the security. A fully secured gold loan that crosses 90 days is still an NPA; the collateral only affects the provision and the loss given default.
2. How should the branch treat the ₹10 lakh deposit offered on 30 March and the ₹18 lakh of interest already booked? What is the effect on profit and capital?
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The 30 March deposit cures nothing. Asset classification is determined by the record of recovery as at the balance sheet date. The arrears had already crossed 90 days well before 30 March; a token ₹10 lakh does not even clear the two overdue instalments plus interest, and it certainly does not clear all arrears, which is the threshold for upgrading an NPA. The account must be reported as substandard at 31 March 2026. Show it as standard and the branch is misstating the balance sheet - an issue for the statutory auditor, the RBI's inspection, and potentially a divergence disclosure.
Income recognition. Once an account is an NPA, interest is recognised only on realisation. The ₹18 lakh already credited in Q3 and Q4 must be reversed, and accrual stopped from the date the account became an NPA.
Profit and capital impact. Pre-tax hit = provision ₹41.00 lakh + interest reversal ₹18.00 lakh = ₹59.00 lakh. At a 25 per cent tax rate the post-tax hit is about ₹44.25 lakh, which reduces CET1 rupee for rupee and, with risk-weighted assets of ₹18,000 crore, moves the CET1 ratio by roughly 0.0025 per cent. Small here, but this is exactly the mechanism by which a branch-level classification error becomes a capital problem when repeated across a portfolio. Significant deferred tax assets are deducted from CET1 under the Basel III rules, so the bank should not assume the tax shield softens the regulatory hit.
3. The borrower asks for a one-time settlement at ₹1.10 crore. What approval, accounting and legal issues arise?
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OTS mechanics. A one-time settlement is a compromise, not a reclassification. Points to get right:
- Policy and delegation. The settlement must be within the board-approved OTS policy and the sanctioning authority's delegated power. ₹1.10 crore against dues of roughly ₹2.4 crore is a large sacrifice, and it will need a higher authority than the branch.
- Provision and write-off. The sacrifice should already be provided for; on settlement the shortfall is written off against the provision and charged to the profit and loss account. The provision is released only when the money is actually received, not when the settlement letter is signed.
- No double benefit. A borrower who can pay ₹1.10 crore in cash while claiming distress invites scrutiny for evergreening; check the source of funds and ensure the settlement is not funded by fresh bank borrowing.
- Guarantor and security. If the account has a guarantor or third-party security, the settlement must address it. Releasing the borrower without the guarantor's consent can discharge the guarantor under Section 134 of the Indian Contract Act, 1872.
- Reporting. The write-off, the recovery and the account's history must be reported correctly in the NPA and recovery returns. An OTS book dressed up as a standard asset is a classic audit finding.