Suban Engineering, a borrower of the branch, had fully utilized its sanctioned cash credit limit of 400Lacs, with an outstanding balance of 413 Lacs…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · May 2025
Suban Engineering, a borrower of the branch, had fully utilized its sanctioned cash credit limit of 400Lacs, with an outstanding balance of 413 Lacs as of March 31, 2024. The bank classified the account as a Sub-standard Asset. During an inspection, the DGM observed that the borrower's premises were damaged, with no machinery, stock, or other assets present. The borrower was unreachable, and an independent verification of assets confirmed that no mortgaged security was available, except for a piece of land with a realizable value of 33Lacs. The bank accepted this report and made a provision considering the account as a Sub-standard Asset. Whether correct classification and provisioning norms have been applied in the account of Suban Engineering?
(A) The account is correctly classified, but provision should be made for hundred percent of the unsecured portion besides making specified provision on secured portion.
(B) The account should have been classified as Doubtful asset and besides making required provision on secured portion, provision should have been made for hundred percent of the unsecured portion.
(C) The account should have been classified as Loss asset and full provision should have been made in the books of accounts.
(D) The account should have been classified as Doubtful asset and full provision should have been made in the books of accounts.

Suggested Answer and Working Notes:

Correct Answer: Option (C)

The account should have been classified as Loss asset and full provision should have been made in the books of accounts.

Topics: Special Features of Audit of Banks & Non-Banking Financial Companies

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