Appropriation of recovery in npa accounts
RD
(Querist) 03 May 2013
This query is : Resolved
Kindly advise on the following:
In case when there is partial recovery in NPA Account,that recovery should be appropriated towards Interest or Principal?
Does it depend on Agreement entered into between Bank and Borrower?
If Agreement is silent about it, what will be the Legal provision guiding this matter?
Is there any RBI Guideline or ICAI's Guidance Note dealing with this issue?
R.K Nanda
(Expert) 03 May 2013
state full facts.
RD
(Querist) 03 May 2013
Suppose Balance outstanding in Account - Rs.5.30 Lac - including Interest of Rs. 1.25 Lac.
Now the borrower pays Rs 50,000.
Then Bank shall appropriate towards which portion? Interest or Principal?
I want to know if there is any specific RBI or ICAI's guidelines defining the mode of appropriation.
Further, if Agreement entered into between the Bank and Borrower contains a clause that any payment shall first be adjusted against Interest, what difference will it make? Further, will this agreement will hold good even after that Account has become NPA?
Finally, what is the legal position as per Indian Contract Act?
Thanking in Advance
Devajyoti Barman
(Expert) 03 May 2013
Such clause regarding adjustment of payment towards interest is very much valid.
Guest
(Expert) 03 May 2013
RBI can issue instructions of fundamental nature, not pertaining to the internal business policies of a financial institution or bank. However, about partial recovery in NPA accounts, the RBI prescribes simply as follows in its guidelines for NPA accounts:
"Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/additional credit facilities sanctioned to the borrower concerned."
About ICAI's guidelines defining the mode of appropriation, yourself being also a CA, who else other than you can know better about ICAI's guidelines?
I hope, you would like to agree with me that there is a difference between accounting and appropriation. I suppose the the ICAI can issue accouting related guidelines only, but is not supposed to interfere with the Board's decisions about manner of appropriation of deposits in NPA accounts.
If the agreement is silent on the issue, you may better check the accounting policy and well as the business manual, whatever may be the nomanclature, of the concerned bank/ financial institution, as each bank or financial institution has its own accounting policies, which may differ with each other.
However, the normal practice of the banking & financial institution is to appropriate amount towards interest first, unless specified otherwise in the agreement with the client.
Raj Kumar Makkad
(Expert) 03 May 2013
Nothing to add more after reading the detailled reply of Ld. Dhingra ji.
