N Ltd., a manufacturing company, has availed a Cash Credit Facility of 1 crore from XY Bank Ltd. As per the latest stock statements submitted for…

As per prudential norms for classification of advances, a cash credit account is treated as "Out of Order" if: The outstanding balance remains continuously in excess of sanctioned limit/drawing power; orIn cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet; orcredits are there but are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. In the given case: Sanctioned limit = 1 croreDrawing power = 80 lakhOutstanding balance = 75 lakh (within DP)Interest debited = 7 lakhCredits during two quarters = 5 lakh Although the outstanding balance is within the drawing power, the credits in the account are not sufficient to cover the interest debited during the same period. Therefore, applying prudential norms, the cash credit account of N Ltd. shall be classified and reported as “Out of Order”, since the servicing of interest is inadequate, indicating potential stress in the account. As per the definition of Non-Performing Asset (NPA): In respect of OD/CC accounts, an account is treated as NPA when it remains "out of order". Since the cash credit account of N Ltd. is out of order, the same shall be classified as a Non-Performing Asset (NPA) as at the balance sheet date.