Jot Projrcct

8/6/2019 Jot Projrcct

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Introduction:- A well organized and efficient banking system is a pre-

requisite for economic growth. Banks play an important role in the

functioning of organized money market. in order to meet the banking needs

of various sections of the society, a large network of bank branches has

been established. There are four type of banking institutions.

a- Commercial Banks

b- Regional Rural Banks

c- Co-operative Banks

d- Development Banks (Term lending institutions)

Principal Enactment of Banking Functions: There is an elaborateframework governing the functioning of banks in India. The principal

enactment of which governs the functioning of various banks are as under:-

a- Banking Regulation Act 1949

b- Banking Companies (Acquisition and Transfer of Undertaking) Act,

1970

c- Banking Companies (Acquisition and Transfer of Undertaking) Act,

1980

d- State Bank of India Act, 1955

e- Regional Rural Bank Act, 1976

f- Companies Act, 1956

g- Co- operative Societies Act, 1912 or the relevant state Co-operative

societies Act

Besides the above enactment the provisions of Reserve Bank of India Act,

1934 also effect the functioning of banks. The Act gives wide powers to

Reserve Bank of India to give directions to banks, such directions also have

considerable effect on the functioning of banks.

Classification of Assets:- The assets may be classified in two types


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a- Performing asset

b- Non- Performing Asset (NPA)

W.e.f. 31

st

march 2004 NPA is a loan or an advance where,

1- Interest and/ or Installment of principal remain over due for a period

of more than 90 days in respect of term loan.

2- The account remain out of order for a period of more than 90 days in

respect of an over draft/ cash credit.

3- The bill remains over due for a period of more than 90 days in the

case of bills purchased and discounted.

4- Interest and/ or Installment of principal remain over due for two

harvest seasons but for a period not exceeding 2 years, in case of an

advance granted for agricultural purpose and in respect of advances granted

for agricultural purpose w.e.f. 30th September 2004, a loan granted for short

duration crops will be treated as NPA, if the installment of principal or

interest thereon remains over due for two crops season and loan granted for

long duration crops will be treated as NPA, if the installment of principal and

interest thereon remain overdue for one crop seasons, and

5- Any amount to be received remains overdue for a period of more than

90 days in respect of other account.

Reserve Bank of India has laid down norms for classification of assets and

provisioning norms for NPA, however certain exceptions to these norms are

discussed below:-

I. Temporary deficiencies e.g. non availability of current drawingpower due to non-receipt of latest stock statement, temporary delay inrenewal of limit on due date etc.

II. Natural calamities, where in the wake of natural calamities shortterm agricultural loans are converted into long term or there is

rescheduling of repayment period or fresh short term loans are


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sanctioned, the term loans as well as fresh short term loan may be

treated as current dues and need not to be classified as NPA.

III. Facilities Backed by Central Government Guarantee:- creditfacilities backed by guarantee of the Central Government though

overdue should be treated as NPA only when government repudiates

its guarantee when invoked (this exception is only for the purpose of

asset classification and provisioning and not for the purpose of

recognition of income.)

The Reserve Bank of India has issued guidelines to be followed by all

scheduled commercial banks excluding regional rural banks for income

recognition, asset classification provisioning and other related

matters. Conceptually speaking a credit facility become NPA when it

ceases to generate income for bank. The guidelines require that income

should be recognized only on realization irrespective of the system of

account followed by the bank. The guidelines further provide that if interest

income from asset in respect of a borrower become subject to non-accrual

fees, commission, and similar income with respect to the same borrower

that have been accrued ceases to accrue in the current period should be

reversed or provided for with respect for past period, if uncollected where

interest is partly realized on any non-performing asset, such interest can betaken to the profit & loss account towards interest are not out of fresh/

additional credit facilities sanctioned to the borrower concerned.

Advance secured against term deposits, national saving certificates eligible

for surrender of Indira Vikas patra, Kisan Vikas Patra and LIP have been

exempted from the above guidelines. Thus interest on such advances may

be taken to income account or due date provided adequate margin is

available in the respective account.

Regulation of account by the year end :- The identification of NPA to be

done on the basis of assets as on the Balance sheet date. If the account

indicates inherent weakness on the basis of the data available, the account

should be treated as NPA.


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The account where regular/ advance credit limit have not been renewed/

reviewed within 180 days from the due date/ date of adhoc sanction, the

account should be treated as NPA.

If any of the credit facilities granted to a borrower become non

performing all the facilities granted to the borrower will have to be

treated as NPA without having any regard to the performing status

of other facilities.

Classification of advances:- The guidelines require bank to classify their

advances into four broad categories are as follows:-

a- Standard AssetA standard asset is one which does not disclose any

problems and which does not carry more than normal risk attached to the

business. Such an asset is not a non-performing asset.

b- Sub Standard Asset A sub standard asset is one which has been

classified as NPA for a period not exceeding 12 months.

c- Doubtful Asset A doubtful asset is one which has remained NPA for a

period exceeding 12 months.

d- Loss of Asset A loss of asset is one where loss has been identified by

1- The Bank

2- Internal or External auditor

3- In Reserve Bank Inspection

Example every year banks transferred the amount of those accounts which

declares as Non performing to the non performing asset and normally not in

a position to recover the same from the account holder, following data is

relating to NPA declared by banks during the financial year 2009-10


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Source Bank Name Amount (Rs. In

Crore)

Dainik Jagaran dated29

thNovember 2010

Punajb National Bank 853

Dena Bank 185

Bank of Baroda 515

Cenra Bank 884

Indian Bank 388

Syndicate Bank 419

UCO Bank 371

State Bank of India 1990

Vijya Bank 479

Allahabad Bank 750

Union Bank of India 513

TOTAL 7347

Main Sectors :-

1- Housing Loan includes matter not only relating to providing money for

approval of loan but also relating to modification of loan and then declared

the account as NPA.

In this game those banks are also participating whose financial position are

not good. These banks transferred Rs. 500 crore in NPA account. It means

banks cannot recover this money.


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It is estimating that from the above NPA 40% relating to real estate sector.

Note:- source of data dainik jagaran 22ndNovember 2010

As an auditor you cannot comment upon corruption involve but you can

comment upon the non performing account.

2- Education Loan is the other sector of NPA. In this case banks facing

problem to find those people who had taken professional loan but not repaid

after getting employment these account holder declares as defaulter. 3

As per annual report of Government of India for the year 2009-10 in

education account total 1715016 account having amount ofRs. 32366.61

crore declares as outstanding as on 30th September 2009.

The total outstanding loans of Public Sector Banks (PSBs) for education as

on 31st March, 2009 stood at Rs. 27646 crore, in 1603385 accounts. The

increase in total loans outstanding over previous year in absolute and

percentage terms was Rs. 7829 crore and 39% respectively. Year-wise

break-up of education loans outstanding as on March 31, 2004 to as on

March 31, 2009 is given below:

As onMarch31st

No. ofAccounts

Amt.outstanding(Rs.Crore)

Year on YearGrowth (%)

No. ofAccounts

Amount

2004 319337 4550

2005 468207 6713 46.62 47.54

2006 679945 10012 45.22 49.14

2007 944397 14283 38.89 42.65

2008 1246870 19817 32.03 38.75

2009 1603385 27646 28.59 39.51

As on 30th Sept.

2009#

1715016 32367 6.96* 17.08*

Source: IBA. # Figures are provisional. * Growth over


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March 2009.

You can analyze that year wise education loan outstanding increases so you

should be very careful while checking education loan NPA

Impact on Indian Economy: -after NPA issue came into picture the share

price of those concerns or companies fall on 25th November 2010 which

highlights in this issue

The data given below is as per data published in dainik jagaran on

26th November 2010

Bank/Company % Decrease in price

Punajb National Bank 6.38

Cenra Bank 5.85

Axis Bank 3.35

LIC housing finance 0.98

DB reality 9.99

JP 5.19

DLF 4.13India Bulls 5.22

Unitech 6.04

Conclusion:- I hope after reading this article you will be very careful at the

time of audit of banks because the statutory audit of banks are started from

the last week of march and main focus of auditor is on NPA. Usually banks

urged not to declare the account as NPA. You have to verify large NPA

advances and the provisioning thereof. Design a format for noting down the

particular of each advance while perusing the borrower credit file and

account statement. The format should be designed to ensure that none of

the significant information is missed out.

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