CA Mini was appointed as the statutory branch auditor of DFC Bank Ltd., for the financial year 2024-25. While verifying advances, she observed the…

Case (i) – Term Loan to JT Mills Ltd.: The outstanding balance of the term loan to JT Mills Ltd. is 140lakh and the realizable value of security is 80lakh. The branch has classified the advance as Doubtful – D1 (up to one year) and created a provision of 70lakh. As per RBI Prudential Norms, in case of a doubtful asset up to one year, provisioning is required at 25% of the secured portion and 100% of the unsecured portion. In the present case, the secured portion is 80lakh and the unsecured portion is 60lakh. Accordingly, the required provision is 20lakh i.e., (25% of 80lakh) plus 60lakh (100% of 60lakh), aggregating to 80 lakh. The classification of the advance as Doubtful – D1 is appropriate, however, the provision of 70lakh is inadequate. As per RBI norms, a provision of 80lakh should be made. Case (ii) - Loan to Z Pvt. Ltd.: If the realisable value of the security, as assessed by the bank/approved valuers/ RBI is less than 10 per cent 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. The loan to Z Pvt. Ltd. has an outstanding balance of 65lakh and realisable security value of 6lakh. The realisable value of security is less than 10% of the outstanding amount. As per RBI guidelines on erosion in the value of security, where the realizable value of security is less than 10% of the outstanding balance, the existence of security should be ignored, and the asset should be straight-away classified as a Loss Asset. Such an asset should be either written off or fully provided for by the bank. Therefore, classification of this advance merely as a doubtful asset is not in accordance with RBI norms. The asset should be straight-away classified as a Loss Asset and 100% provision should be made. The classification and provisioning made by the branch are not in accordance with RBI Prudential Norms.