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CA Intermediate · Auditing and Ethics · Audit of Banks

While auditing Sagar Co-operative Bank's term loans, the auditor finds that a borrower's account has remained in default for interest for 100 days as of the balance sheet date. Under the RBI prudential norms, how should the auditor view the classification of this advance?

The advance must be classified as non-performing, because under RBI prudential norms a term loan with interest or instalment overdue for more than 90 days becomes an NPA. It is initially substandard, not doubtful, and classification follows the norms rather than any board discretion.

  1. AIt must be classified as non-performing because interest has remained overdue for more than 90 daysCorrect
  2. BIt remains a standard asset because the 90-day period applies only to cash credit accounts
  3. CIt is a doubtful asset because any overdue above 90 days is automatically doubtful
  4. DIt may be treated as standard until the bank's board resolves to classify it as NPA

Explanation

Under the RBI's income recognition and asset classification norms, a term loan is non-performing when interest or instalment remains overdue for more than 90 days. Doubtful status needs a period in the substandard category (12 months), so option C is wrong. Classification is rule-based, not a board option.

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