Classification of State Government guaranteed investments as NPI
With effect from the year ending March 31, 2006, investment in State Government guaranteed securities, including those in the nature of ‘deemed advance’, attract prudential norms for identification of NPI and provisioning, when interest/installment of principal (including maturity proceeds) or any other amount due to the bank remains unpaid for more than 90 days.
The prudential treatment for Central Government Guaranteed bonds has to be identical to Central Government guaranteed advances. Hence, bank’s investments in bonds guaranteed by Central Government need not be classified as NPI until the Central Government has repudiated the guarantee when invoked. However, this exemption from classification as NPI is not for the purpose of recognition of income.
The audit procedures would include:
Identifying Non Performing Investments based on RBI guidelines as defined above. In case advances given to a party is classified as NPA, investment in securities issued by same party also needs to be classified as NPI and vice-versa except in case of preference shares, wherein if apreference share is classified as NPI, the performing securities and performing credit facilities granted to the said party need not be treated as NPI / NPA.
Ascertaining whether the bank has made appropriate provision for the depreciation in the value of the NPI.
Ensuring that the banks have not off-set the depreciation on NPI against the appreciation in respect of other performing securities.
Obtaining separate list of investments as a result of conversion of interest/ principal. These investments need to be classified as NPI ab initio, if the loan’s classification is NPA on implementation of the restructuring package.
Special Aspects
The auditor should pay special attention to ascertaining whether the investments have been purchased or sold cum-dividend/ex-dividend, cuminterest/ex-interest, cum-right/ex-right, or cum-bonus/ex-bonus. They should check whether appropriate adjustments in this regard have been made in the cost/sales value of securities purchased or sold.
In the case of a right issue, the offer letter should be examined. The auditor should check control over recording, exercising, renouncing of rights and also valuation of rights yet to be exercised. Where the rights have been renounced or otherwise disposed off or not exercised, the auditor should examine that same have been duly accounted for. Similarly, the auditor should examine the relevant documents in the case of detachable warrants. They should also examine that these have been properly accounted for.
As regards bonus shares, the intimation to the bank regarding such issue should be examined with a view to ascertaining the receipt and recording of the requisite number of shares in the records maintained by the bank in this regard.