‘How bank treats NPA interest not for borrower to interpret’

livemint.com:

NEW DELHI : Banks not recognizing any interest income on bad loans by following RBI’s prudential norms does not absolve borrowers from the obligation to show the interest liability on their financial statements, audit regulator National Financial Reporting Authority (NFRA) said in a regulatory order. NFRA said defaulters are not free of the obligation to recognise interest liability as banks are required to maintain a record of accrued interest on bad loans and do not release the borrower from the contractual liability to pay interest.

NFRA said in a disciplinary order issued against a Jharkhand-based audit firm and a chartered accountant that the contention of auditors that since no interest was being charged by the bank, there was no obligation on the audited company to recognize interest cost, was not correct. The auditors are completely wrong in their assumption that the lending bank did not charge interest on the borrowings classified as non performing assets (NPAs), NFRA said.

The banks do discontinue, in their accounts, the recognition of interest income on the assets classified as NPAs based on the prudential norms of the RBI, explained NFRA. “However, RBI guidelines also require the banks to maintain a memorandum record of accrued interest on the NPAs, clearly reflecting the fact that the bank has not legally released the borrower from their contractual liability to pay interest...," the audit watchdog explained in its order posted on its website.

The outstanding balance of the customer will include the interest charged by the bank on such borrowings along with some penal interest as per the contract between the customer and the bank, NFRA said. “This accounting treatment by the lending bank cannot be a premise