NPA –Planning, Expert answer

Critical questions on NPA of Term Loans ?

What would be the status of the account in the following case?
Term Loan instalment of Rs. 1000/- EMI was due from Apr -08. The first installment
was not paid in april -08. Subsequently, every month the borrower has remitted
Rs.1,000/-. Whether the account has to be treated as NPA ?

The query was posted to me by one of my assistant. It looked tricky. My assistant,

Mahesh and shraddha are intelligent persons. I cannot give an answer without
supporting my opinion. As per the circular it appears that

“ A term loan account is to be treated as NPA if the installment or principal is

not paid for more than 90 days”

One has to identify which installment is overdue on the date of determination. The
determination date is more important. Suppose the date of determination in the
above case is 31st March, 2009.

Let us find which installment is overdue.

By analyzing one can easily find out that one instalment is overdue. By applying
the LIFO method, it is clear that the installment due is of March,2009. Since the
unpaid installment is that of march 09 it is not overdue for more than 90 days.
This concept is further supported by the fact that NPA classification is based on
the concept of Recovery. Any one can see that 11 out of 12 installments were paid.
It is also up to the Auditors to apply the concept of substance over form.
Treatment of Cash Credit account and Term Loan are altogether different.

It is possible to do NPA Planning, as like Tax Planning, THREE R CONCEPT.

- to be continued

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