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

Shree Lakshmi Traders has a cash credit account with a scheduled commercial bank. The account has remained 'out of order' for 95 days, because the outstanding balance has stayed continuously above the sanctioned limit and there have been no credits sufficient to cover the interest debited in the period. Under the RBI prudential norms on asset classification, how should the bank treat this account?

The account is a non-performing asset. A cash credit account that stays out of order, with the balance above the limit or no credits covering the interest, for more than 90 days is classified as NPA under RBI prudential norms, even if the borrower keeps operating it.

  1. AAs a standard asset, because the borrower still operates the account
  2. BAs a non-performing asset, because an out-of-order account for more than 90 days is NPACorrect
  3. CAs a special mention account only, with no NPA classification
  4. DAs a non-performing asset only after 180 days of being out of order

Explanation

Under the RBI norms, a cash credit or overdraft account is treated as 'out of order' when the outstanding balance stays continuously in excess of the sanctioned limit or drawing power, or when there are no credits covering the interest debited during the period. If this persists for more than 90 days, the account is an NPA. The 180-day option is wrong because that period is not the NPA trigger for such accounts.

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