Sacrifice of interest :
In respect of sacrifice of interest, the auditor should examine whether:
(a) Interest sacrifice involved in the amount of interest has been provided for by debit to Profit & Loss account and held in a distinct account.
(b) Sacrifice is recomputed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR/ Base Rate, term premium and the credit category of the borrower and the consequent shortfall in provision or reversal of the amount of excess provision has been held in the distinct account.
(c) In the event any security is taken against interest sacrifice, the same has been valued at Re.1/- till maturity of the security. As per RBI norms, the interest sacrifice in all the restructured cases needs to be worked out including for Working Capital Loans. In the case of working capital facilities, the diminution in the fair value of the cash credit /overdraft component may be computed reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components The process of identifying such interest sacrifice in case of working capital loans needs to be looked upon in detail.
In case the bank has agreed to convert existing/future exposure to the borrower in to Funded Interest Term Loan, such interest should be parked under sundry liabilities and should not be reckoned as income.
Separate norms for classification have been prescribed for accounts covered under schemes for ‘Restructuring / Rescheduling of Loans’, ‘Corporate Debt Restructuring (CDR)’ or ‘Small & Medium Enterprises (SME)’. The auditors should go though the same to see whether these have been properly applied by the bank.