A Slow Cash Credit Account: NPA Dating, Provisioning and Interest Suspense
Sunrise Alloys Pvt Ltd has a cash credit limit of Rs 5.00 crore, sanctioned on 1 April 2023 and reviewed every 30 June. Drawings stand at Rs 4.80 crore, and the balance outstanding is Rs 5.25 crore, including Rs 45.50 lakh of interest debited on 30 June 2024 (Rs 21.50 lakh) and 30 September 2024 (Rs 24.00 lakh) that has never been paid. The last stock statement received covers March 2024; the September and December statements are still awaited. There have been no credits in the account since 15 May 2024. The bank's only security is a second charge on the factory, valued at Rs 9 crore, on which another bank holds a first charge of Rs 6 crore. The branch has already provided Rs 72 lakh and has classified the account as substandard. On 10 January 2025 the borrower remits Rs 50 lakh and asks that the account be upgraded to standard so that a fresh term loan for expansion can be sanctioned. The statutory audit is scheduled for February 2025.
1. Is the account an NPA, and from what date? Set out the test you applied and the SMA progression, and state the classification as at 31 March 2025.
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The test. For a cash credit account, 'out of order' is the trigger, and one limb of it is that there have been no credits continuously for 90 days, or the credits are insufficient to cover the interest debited during the period. A second limb is that the drawing power is stale - stock statements not received for three months means the drawing power cannot be validated.
Dates. Last credit: 15 May 2024. Ninety days later is 13 August 2024, so the account became an NPA on that date. In the interim it moved through SMA-1 (overdue 31-60 days) and SMA-2 (61-90 days) in the June-July window. The stop on stock statements from September 2024 is an independent, continuing irregularity.
Why the substandard tag is right. An NPA that has been in that category for up to 12 months is substandard. The account became NPA in August 2024, so at 31 March 2025 it has been NPA for about seven and a half months - still substandard. It becomes doubtful only after 12 months, i.e. from around August 2025, and then attracts 25% provisioning on the secured portion for the first year (40% in years two and three, 100% beyond three years).
Audit point: the classification is correct; the provision is not (see next task).
2. Compute the provision required at 31 March 2025 and explain the income-recognition treatment of the Rs 45.50 lakh of debited interest. Is the Rs 72 lakh already held adequate?
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Split secured from unsecured. The bank's realisable security is the residual value of the factory after the first charge: Rs 9 crore - Rs 6 crore = Rs 3.00 crore. Against an outstanding of Rs 5.25 crore, the unsecured portion is Rs 2.25 crore.
Provision.
- Secured portion: 15% x Rs 3.00 crore = Rs 45.00 lakh
- Unsecured portion: 25% x Rs 2.25 crore = Rs 56.25 lakh
- Total = Rs 101.25 lakh
Against this, the branch holds Rs 72 lakh. There is a shortfall of Rs 29.25 lakh to be charged to the profit and loss account before the audit signs off. (No further haircut is applied here because the bank's policy uses the net realisable value of the residual charge; if the policy prescribes a haircut on forced-sale value, the unsecured portion - and the provision - rises further.)
Income treatment. On an NPA, income is recognised only on realisation. The Rs 21.50 lakh debited in June 2024 was recognised before the account slipped and must be reversed from interest income; the Rs 24.00 lakh debited in September 2024 was debited after the account had already turned NPA and must not be recognised at all. Both amounts are parked in an interest suspense account and credited to income only if and when actually recovered.
Audit point: the provision is understated by Rs 29.25 lakh and income is overstated by Rs 45.50 lakh - both are material to the branch's P&L.
3. How should the bank deal with the Rs 50 lakh remittance and the request for an upgrade and a fresh term loan?
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Appropriation. Apply the Rs 50 lakh first against the outstanding interest of Rs 45.50 lakh and the balance against principal, following the bank's stated appropriation policy and the terms of the sanction. The customer cannot dictate that it be treated as principal.
Upgrade rule. An NPA account is upgraded to standard only when the entire arrears of principal and interest are paid - not a part payment. Rs 50 lakh clears interest and touches principal, but it will not regularise an account where drawing power is stale and where no credits have flowed for eight months. The account remains substandard, and provisioning is recomputed on the reduced outstanding without any change in classification.
Fresh term loan. A new facility to a borrower whose existing account is NPA is not a routine credit decision. Reasons to decline at this stage:
- The account must demonstrate satisfactory operation for a sustained period, typically at least a year, before fresh exposure is considered.
- No stock statements for three quarters, no credits for eight months, and a request for expansion funding is a classic diversion red flag. Order a stock audit and consider a forensic audit.
- Check the wilful defaulter and fraud databases, and CRILC reporting.
If the bank still wishes to lend later, it should be a fresh sanction with the account regularised for the required period, proper drawing power based on current stock statements, and adequate additional security - not an upgrade on the strength of one remittance.