Announcement – Queries on Bank Audit 2007-08
The file contains some of the queries raised by the members in relation to the audits of 
banks and bank branches for the year ended 31.March 2008. The queries were responded by an expert panel comprising senior members from the profession. The responses given by them represent the personal vies of the concerned expert(s). The Institute of Chartered Accountants of India may not necessarily subscribe to the views expressed by the expert(s) nor does the Institute accept responsibility for the action taken by the querists on the basis of the responses of the expert(s).
| ISSUE | REPLY | |||
| NPAAGRICULTURAL ADVANCES:- | ||||
| 1) As regards Agricultural advances, they become NPA when the principal and interest remains overdue for two crop seasons. For the area covered by the branch they are contending that Paddy cultivated comes under one cropping Pattern(One cultivation & Harvesting for each year). The normal period of cultivation and harvesting for paddy is six months. In the above situation the branch is of the opinion that the two crop seasons refers to two years (not one year as assumed by us) and the accounts become NPA if the principal & interest remains overdue for two & half years. Is the contention put forth by the bank is in accordance with RBI guidelines? If it is correct, What is the sort of evidence I should obtain to conform that the above crop comes under one cropping pattern? Please elucidate.2) I want to know about NPA classification of discounted export bills guaranteed by ECGC. Bill discounted by bank is of 120 days maturity and generally paid after long overdue period. The bank management has not classified them NPA because they are covered by guarantee of ECGC, i.e., Central Government. I have gone through the RBI master circular but failed to get reply in clear terms. Please guide. | Both your queries are in respect of agricultural advances and issue in both the queries is common .i.e. nature of crop – whether it is long duration or short duration. As I understand from your query, in your view the crop in question is short duration crop but in view of the Bank, the crop is long duration crop. In such situation what is the recourse available to you as auditor? I invite your attention to para 4.2.12 of Master Circular dated 2nd July 2007 issued by Reserve Bank of India. In sub para (i) of this para it is very clearly mentioned as under. “The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him.”Classification of NPA is based on record of recovery. The same is not dependent on availability of security. In the above case, the advance is an NPA, if it is overdue for more than 90 days after the due date of payment. Availability of ECGC cover will only affect the security status for provisioning if it is to be classified as doubtful. | |||
| In respect of Agriculture Advances, the bank management says that fresh NPAs identified during the audit are covered by Waiver scheme announced by the Honourable Finance Minister in the budget speech. Kindly advise whether to go without classifying them as NPA in the absence of any circular from RBI. | The agriculture loans scheme is a budget proposal submitted by the Hon. Finance Minister in House (Parliament). The proposal is yet to be approved and become effective. RBI has also not issued any communication amending the existing instructions regarding NPA(Agricultural Advances). As such, all the agricultural advances, including those which are likely to be covered by the budget proposal, will have to be classified and provided for as per the existing guidelines of RBI. | |||
| I want to know about NPA classification of discounted export bills guaranteed by ECGC. Bill discounted by bank is of 120 days maturity and generally paid after long overdue period. The bank management has not classified them NPA because they are covered by guarantee of ECGC, i.e., Central Government. I have gone through the RBI master circular but failed to get reply in clear terms. Please guide. | Classification of NPA is based on record of recovery. The same is not dependent on availability of security. In the above case, the advance is an NPA, if it is overdue for more than 90 days after the due date of payment. Availability of ECGC cover will only affect the security status for provisioning if it is to be classified as doubtful. | |||
| Sub: Statutory audit of banks 07-08 | If any advance is not rescheduled as per the scheme, the same shall be required to be classified as NPA, if it fulfills all other conditions of a NPA under IRAC norms prescribed by RBI. | |||
| Agricultural advances are usually re-scheduled in certain districts in the month of March as drought affected area and not classified as NPA. Since there is a proposal in the budget for debt relief to farmers, the banks cannot re-schedule such accounts as the applicants fear that they may be out of the relief programme because of such re-schedulement. The Branch Managers are in a difficult situation as they cannot re-schedule such accounts at their own risk without obtaining application as the proposed scheme may exclude such accounts. Whether all agricultural advances not re-scheduled in time are to be classified as NPA? | ||||
| Please guide me regarding treatment of loan waiver recently announced by the government. What will be treatment of NPA agricultural loans waived? | Till today, no circular in this regard has been issued by RBI and hence there is no modification in the Master Circular on IRAC issued by RBI on 2nd July, 2007. | |||
| 2. If any internal circular / guideline has been issued by the respective bank, the auditor should take cognizance of the same. | ||||
| 3. If no such circular / guideline is issued, the branch auditor should make a reference of the same in his statutory audit report with a request to the Statutory Auditors to deal with it appropriately at the central level. | ||||
| As per declaration in budget, Agricultural loans are to be waived upto a certain limit. Now on 31st March, 2008, banks can not waive the same and even can not re-schedule. So whether same should be considered as NPA as on 31st March 2008 or not. Please clarify | Income Recognition and Asset Classification norms in respect of advances given by Banks as per Reserve Bank of India Master circular dated 2nd July, 2007 are required to be applied to agricultural advances also. Therefore an agricultural advance will have to be classified as NPA, if by virtue of the above referred norms it has become NPA. | |||
| The branch is granting, besides crop loans, Term loans to agriculturists for purchase of Tractors, Housing and Cash Credit for Business under Agro Mortgage Scheme. The interest is charged at monthly rests but the instalment collected is at the end of the year. The guidelines clearly say that the interest not serviced for more than 90 days is to be classified as NPA. The guidelines are as follows: | I agree with your view regarding the term loans to the agriculturists for purchsase of equipments and other mortgage loans, etc. | |||
| Page 1.132 Para 6.166-167-170-172: | However, if these loans are granted to agriculturists and if the repayment of these loans are dependant upon the cropping pattern of the area and accordingly the repayment schedule has been prepared as per loan document and if the terms of repayment have been finalized accordingly, then the accounts shall continue to remain standard , if the repayment is as per scheduled terms. | |||
| “In line with the international best practices and to ensure greater transparency, the Reserve bank of India has directed the banks to adopt the “90 days overdue” norm for identification of NPAs from the year ending March 31, 2004.” | It shall depend upon the contract terms , which would depend upon the cropping pattern and cash flows of the agriculturists. | |||
| Banks have been charging interest at monthly rests, from April 1, 2002. However the banks were advised that the date of classification of an advance as NPA would not be changed on account of charging interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. | ||||
| A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop season and a loan granted for long duration crops will be treated as NPA, if the instalment of principal and interest thereon remains overdue for one crop season. | ||||
| As per guidelines, “long duration” crops would be crops with crop season longer than one year crop, which are not “long duration” crops would be treated as short duration” crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed by him. | ||||
| The above norms should be made applicable to all direct agricultural advances as listed in the Master Circular on Lending to Priority Sectors (RPCD.No.Plan. BC. 84/04/09.01/2006-2007 dated 30th April 2007.) In respect of all other agricultural loans, identification of NPAs would be done on the same basis as non-agricultural advances, which, at present is the 90 days delinquency norm. | ||||
| I am suggesting to classify all the loans (except those sanctioned against crops) granted for business or purchase of assets and housing etc., as NPAs for which the bank is resisting. Kindly advise as to the classification of such loans whose interest is not serviced in 90 days. | ||||
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