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CS Professional · Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

Kaveri Bank earns interest on a term loan of Rs 40 lakh at 9% simple interest p.a. The account was classified as NPA, and no interest has been received for the past 6 months, although it was accrued in the books. At the year-end the bank follows income recognition norms. What is the correct treatment of the Rs 1,80,000 interest accrued on this account for those 6 months?

The Rs 1,80,000 interest, which is 40 lakh at 9 percent for six months, must be reversed or not recognised as income because the account is an NPA. Under RBI income recognition norms, interest on NPAs is booked only when actually received.

  1. ARecognise it as income because it is accrued and contractually due
  2. BReverse it or not recognise it, and book it as income only when actually receivedCorrect
  3. CCredit it to the general reserve for later distribution
  4. DShow it as income and create a 100% provision against it

Explanation

Interest for 6 months = 40,00,000 x 9% x 6/12 = Rs 1,80,000. Under RBI income recognition norms, income on NPAs is recognised only on actual receipt, so accrued unrealised interest is reversed or not taken to income. Recognising it with a provision still overstates income.

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