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

Sundaram Textiles Ltd has a cash credit account with a bank. Interest debited to the account during the last quarter was Rs 4 lakh, but total credits in the account during that same quarter were only Rs 3 lakh. Under the RBI prudential norms on asset classification, how should the account be treated?

The account is non-performing. For cash credit and overdraft accounts, the asset is out of order when credits in the period do not cover the interest debited. Here credits of Rs 3 lakh fall short of Rs 4 lakh interest, so the shortfall makes it an NPA under RBI norms.

  1. APerforming, as credits were received during the quarter
  2. BNon-performing, as credits are not enough to cover the interest debited during the quarterCorrect
  3. CPerforming, as the account is within the sanctioned limit
  4. DNon-performing only if the account stays so for 180 days

Explanation

A cash credit or overdraft account is out of order if credits during the last 90 days are not enough to cover the interest debited in that period. Credits of Rs 3 lakh are less than interest of Rs 4 lakh, so the account is out of order and the asset is NPA. Having some credits or staying within limit does not cure this.

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