Sale/ Purchase of NPAs
In case of a sale/ purchase of NPAs by the bank, the auditor should examine the policy laid down by the Board of Directors in this regard relating to procedures, valuation and delegation of powers.
The auditor should also examine that:
(i) only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
(ii) the assets have been sold/ purchased “without recourse’ only.
(iii) subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other type of risk relating to the sold NPAs.
(iv) the NPA has been sold at cash basis only.
(v) the bank has not purchased an NPA which it had originally sold.
In case of sale of an NPA, the auditor should also examine that:
(i) on the sale of the NPA, the same has been removed from the books of the account.
(ii) the short fall in the net book value (NBV) has been charged to the profit and loss account.
(iii) where the sale is for a value higher than the NBV, no profit is recognised and the excess provision has not been reversed but retained to meet the shortfall/ loss on account of sale of other non-performing financial assets.
Similarly, in case of purchase of NPAs, the auditor should verify that:
(i) the NPA purchased has been subjected to the provisioning requirements appropriate to the classification status in the books of the selling bank.
(ii) any recovery in respect of an NPA purchased from other banks is first adjusted against its acquisition cost and only the recovered amount in excess of the acquisition cost has been recognised as profit.
(iii) for the purpose of capital adequacy, banks has assigned 100% risk weights to the NPAs purchased from other banks.