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CS Professional · Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

Arjun Agro Ltd's term loan was classified as NPA, and the bank had earlier recognised interest on it of ₹4,00,000 that remained uncollected, included in income for the year. The bank also holds a standard-asset account whose interest is overdue for 60 days. Under income recognition norms, what should the bank do?

The bank should reverse the ₹4,00,000 uncollected interest on the NPA account, because income on NPAs is recognised only when actually received. The 60-day overdue account remains standard, so its interest is still recognised on accrual. Borrower type does not matter.

  1. AReverse the ₹4,00,000 uncollected interest on the NPA, and keep recognising interest on the 60-day overdue standard account on accrualCorrect
  2. BKeep the ₹4,00,000 as income and make a provision for it
  3. CReverse the interest on both accounts
  4. DReverse ₹4,00,000 only if the borrower is a company

Explanation

Income on NPAs is recognised only on a cash basis, so uncollected interest already booked must be reversed or derecognised once the account turns NPA. The standard account, overdue for only 60 days, is not an NPA and continues on accrual basis. Retaining the income with a provision breaches the norm, and borrower type is irrelevant.

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