Reserve Bank of India has introduced prudential norms for income recognition of the advances portfolio of the banks. These norms are used during the year by bank to recognize its income.
At the end of the year, auditor is required to see whether these income recognition norms are followed or not, in addition to other requirements.
As per the present norms introduced by RBI, bank should charge interest at monthly rests on accrual basis if the loan or advance is classified as standard asset and on cash basis in cases where the advance has been classified as a non-performing asset or NPA.
This means, Income from Non Performing Asset or NPA, is not recognized on accrual basis but is booked as income only when it is actually received by the bank.
Interest accrued in respect of standard or performing assets may be taken to income account as the interest is reasonably expected to be received.
Recognition of income in some special cases
In cases of agricultural advances, interest would be linked to crop seasons. This means interest on monthly rests shall not be applicable to agricultural advances.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs provided adequate margin is available in the accounts. For this reason, 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.
If Government guaranteed advances become ‘overdue’ and thereby NPA then interest on such advances should not be taken to income account unless the interest has been realized.
Fees and commissions earned by the bank as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
Interest income in respect of restructured accounts classified as ‘standard assets’ will be recognized on accrual basis and that in respect of the account classified as ‘non performing assets’ will be recognized on cash basis.
Reversal of Income in case of NPA assets
In case of NPA or Non Performing Assets, interest accrued and credited to income account in the corresponding year, should be reversed or provided for if the same is not realized.
This means, the amount of interest so taken to income in the corresponding year should be reversed or should be provided for in full. This will apply to Government guaranteed accounts also.
If interest income from assets in respect of a borrower becomes subject to non-accrual then fees, commission and similar income with respect to same borrower that have been accrued should ceased to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.
Banks should show accrued interest on NPAs separately or park in a separate account so that interest receivable on such NPA account is computed and shown as such, though not accounted as income of the bank for the period.