Recovery Policy in Respect of Bad/Doubtful Debts/ NPAs
The auditor is expected to report on the following aspects of the recovery period:
Existence of a recovery policy; regular updation thereof; monitoring and adherence thereto; compliance with the RBI guidelines.
System of monitoring of recovery from credit card dues in respect of credit cards issued.
Effectiveness of the system for compiling data relating to the bad and doubtful debts and the provision in respect thereof.
System for identification, quantification and adequacy of provision (including that at foreign branches).
System for suspension of charging of interest and adherence thereto.
Ascertaining the realisable value of securities (including valuation of fixed assets) and the possible realisation from guarantors including DICGCI/ ECGC/CGST.
Assessment of the efficacy of rehabilitation programmes.
Method of appropriation of recoveries against principal, interest, etc.
System of compromise/ settlement. Review such cases and cases of recovery of over Rs.1.00 crore and also the cases wherein limit of sacrifices laid down in the Recovery Policy is exceeded. Compliance with RBI guidelines.
Provision/write-offs under proper authority.
Recovery procedures including those relating to suit filed and decreed accounts
System of identifying and reporting of willful defaulters.
The Bank should have a policy for recovery of the bad and doubtfuldebts and NPAs. The auditor should examine whether the policy framed complies with the RBI guidelines and also that the same policy is followed by the branches. The policy should be regularly monitored and updated keeping in view the RBI guidelines where the bank gives credit to its customers by way of credit card also, the auditor should examine whether proper procedure is adopted to recover the credit card dues. The RBI has issued a Master Circular on “Credit Card, Debit card and Rupee Denominated Cobranded Prepaid Card Operations of banks” (RBI/2015-16/31 DBR.No.FSD.BC. 18/ 24.01.009/ 2015- 16) dated July 1, 2015. The circular provides general guidelines to banks on their credit card operations, and the systems and control expected of them in managing their credit card business.
The RBI has issued detailed guidelines for income recognition, asset classification, provisioning and other related matters vide Master Circular on “Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” (DBR.No.BP.BC.2/21.04.048/2015-16) dated July 1, 2015. Under the guidelines, the quantum of provision as also the charging of interest is dependent upon the classification of advances into performing or non-performing. The non-performing advances are required to be further classified into sub-standard, doubtful and loss assets. The auditor should satisfy himself that there exists a system of ensuring correct classification of advances as per the RBI guidelines. For this purpose, the auditor should review the adequacy and appropriateness of the instructions issued to the branches.
According to the aforesaid guidelines, income from Non-performing Advances (NPAs) is not recognised on accrual basis but is booked as income only when it is actually received. However, interest on advances against term deposits, NSCs, IVPs, KVPs and life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. As a measure of control and also to ensure that the legal remedies against defaulting borrowers are not adversely affected, banks normally follow the procedure of recording interest on non-performing advances in a separate account styled as ‘Interest Suspense’ or maintaining only a record of such interest in proforma accounts. It may be noted that the amounts held in Interest Suspense Account (or other similar account) cannot be reckoned as part of provision in respect of non-performing advances. Amounts lying in Interest Suspense Account are to be deducted from the relevant advances, and provisions (as required by the RBI norms) are to be made on the balances after such deduction.
The auditor should enquire into the procedure followed by the bank for recording interest on non-performing advances. Any departures from the laid down procedure which comes to the auditor’s attention should be reported. The auditor should also comment on the increase/ decrease during the year in the aggregate balance held in Interest Suspense Account.
Realisable value of securities is relevant in determining provisioning against doubtful debts. Therefore, the auditor should examine whether there is a system of having realistic estimates of the value of security available, such as immovable properties, plant and machinery and stocks. The availability of security or net worth of borrower/guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on record of recovery.
Every bank usually has a procedure for the write-off of bad debts,including the limits on authority to deal with/approve such write-offs. These limits are normally sanctioned by the Board of Directors or other similar authority. The auditor should examine the relevant procedure as also whether the provisions/write-off confirm to the laid down procedures.
At times, the Management may opt for one-time settlement or an outof- court settlement with the defaulting borrowers on agreed stipulations as to down payment and installment over a period. The auditor should verify the authority for write-off, if any, arising out of such settlement and the system for proper accounting thereof.
As regards advances to sick units which are under rehabilitation programmes, the auditor should examine whether the bank has adhered to the broad parameters for grant of relief / concessions as per the RBI guidelines. The auditor should examine the efficacy of rehabilitation programs by comparing the actual performance with the estimates contained in the rehabilitation programme. On the basis of such assessment, the auditor should examine whether any further provision is required in respect of the units concerned. In this regard, it may be pointed out that the Guidelines require that provision should continue to be made in respect of the dues to a bank in respect of existing credit facilities sanctioned to a unit under rehabilitation, as per their classification as substandard or doubtful asset. As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement. Further, in respect of additional credit facilities granted to SSI units which are identified as sick and where rehabilitation packages/ nursing programs have been drawn by the bank themselves or under consortium arrangements, no provision need to be made for a period of one year.
The auditor is also expected to comment on the efficacy of the procedure for recovery of bad/doubtful advances, including that relating to suit-filed and decreed accounts. The auditor can get the relevant information from the branch audit reports and from the records maintained at head office/regional or zonal offices. The auditor should particularly review the efficacy of procedure for recovery in cases where decrees have been obtained in favour of the bank. Where there are significant doubts about the execution of the decrees, the auditor should take this fact into account in determining the adequacy of the provision.