PARK Bank Ltd. is reviewing the Cash credit limit worth 3 crores of Manish Manufacturing Pvt. Ltd. During the quarterly review, the credit officer…
CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · January 2026
PARK Bank Ltd. is reviewing the Cash credit limit worth 3 crores of Manish Manufacturing Pvt. Ltd. During the quarterly review, the credit officer noticed that the latest stock statement available was more than three months old. Based on this old statement, the drawing power (DP) calculations showed that the outstanding amount exceeded the permissible limit. Further, the sanction limits were due for renewal, but the renewal process had not been completed on time. However, the excess outstanding was only temporary and resulted from a short-term timing mismatch in receipts. The officer is unsure whether the account should be classified as a Non-Performing Asset (NPA) in light of these observations. Evaluate the situation and determine, with reasons, whether the bank should classify the account as NPA.
Suggested Answer and Working Notes:
Banks should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of drawing power based on latest available stock statement, balance outstanding exceeding the limit temporarily and non-renewal of limits on the due date. However, stock statements relied upon by the banks for determining drawing power should not be older than 3 months. The outstanding in the account based on drawing power calculated from stock statements older than 3 months are considered as irregular. Although the account reflects irregularity due to reliance on outdated stock statements, the deficiencies identified are temporary and do not independently justify NPA classification. The bank must obtain an updated stock statement promptly and continue monitoring the account, but NPA recognition is not warranted at this stage.
Topics: Professional Ethics & Liabilities of Auditors, Special Features of Audit of Banks & Non-Banking Financial Companies
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