During the audit of SITU Bank Ltd, the auditor reviews the loan portfolio and comes across the account of M/s Neem Tree Infrastructure Ltd., which…

Erosion means the gradual destruction or diminution of something not prudent to follow stages of asset classification. It should be straight-away classified as doubtful or loss asset as appropriate as follows: (i) Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straight-away classified under doubtful category and provisioning should be made as applicable to doubtful assets. (ii) If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10% of the outstanding in the borrower accounts, the existence of security should be ignored and the asset should be straight-away classified as loss asset. It may be either written off or fully provided for by the bank. Based on above, the two accounts can be classified as per RBI norms as under : M/s Neem Tree Infrastructure Ltd. The realizable value of the security (₹ 0.8 crore) is less than 50% of the value assessed at the time of last inspection (6crore).This represents significant erosion in the value of security.Hence, the account should be straight-away classified as a Doubtful Asset, and provisioning should be made as applicable to doubtful assets. M/s Gayatri Textiles Pvt. Ltd. The realizable value of security (₹ 0.4 crore) is less than 10% of the outstanding balance (5crore).This means the security is practically non-existent.Therefore, the account should be classified as a Loss Asset, which may be written off or fully provided for by the bank.