Interest on npa account

Income Recognition

3.1    Income recognition - Policy

3.1.1    The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received Therefore, the banks should not charge and take to income account interest on any NPA. 

3.1.2    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. 

3.1.3    Fees and commissions earned by the banks 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.

3.1.4    If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised. 

3.3    Appropriation of recovery in NPAs

3.3.1    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.

3.3.2    In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

  3.4    Interest Application

There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts.

If a borrower does not pay the Installment against a loan for 90 days according to RBI guidelines the bank has to declare the Account NPA. and the interest on the amount can not be charged.

I fully agree with Shri Prasun Chandra Dass

Interest Application

There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts.

I think bank do not charge interest on an NPA account .

Non debiting of Interest in the acount after account is clasified as NPA is practice of the Bank to take benifit of Income Tax. The accounting practice in this connection depends on individuual banks. RBI has not prescribed any procedure or accounting practice to be followed by the Banks in this connection.

Please refer to the Decision of the Supreme Court in Civil Appeal No.3286 of 2010 [decided on 15/04/2010] and reported in 2010[4]SCR 721 = 2010[5]SCC416

Non debiting of accrued interest to an account recognised as NPA does not mean that borrower gets relief for his default. If the interest accrued is debited to NPA account without its recovery it would swell the NPA amount to heavier figure attracting income tax. If interest income generated  but not recovered is added to NPA figure, the bank has to pay income tax on such swelled amount eventhough the same is not recovered. However the internal practice of all the banks is to calculate shadow liabilty figure of the undebited portion of interest and add the same to NPA figure mentioned in the book, whenever recovery action is planned under adjudication process in civil court or DRT or enforcement action under SARFAESI Act. Bank does not loose its right to claim in respect of undebited portion of interest merely becuase it is not reflected in the book of accounts. The same analogy applies to NPA accounts if the account is written off to '0' (in order to reduce the burden of provision) in the book of acoounts.

Dear All,

Kindly give me the legal footing from legal books and practices --

I feel that banks reverse the interest component income to save their income tax but keep charging interest to the borrower.

please let me know  some documents - which says that banks need not charge interest on their NPA assets and also not charge the interest to borrower once it is declared as NPA.

thanks and regards