During the statutory audit of Pragati Bank Ltd. for the financial year ended 31st March, 2026, CA Nikhil examined the advances portfolio and noticed…

As per prudential norms applicable to banks in India, an asset which remains non-performing for a period less than or equal to 12 months is classified as a Substandard Asset and requires provision at 15% of the outstanding amount. Accordingly, the advance granted to M/s Aarav Traders, which remained NPA for 8 months, should be classified as a Substandard Asset and provision should be made at 15% of ₹ 80 lakhs, i.e., ₹ 12 lakhs. The advance granted to M/s Bright Metals amounting to ₹ 120 lakhs, secured to the extent of ₹ 90 lakhs, had remained doubtful for 6 months. Since the doubtful period is less than 1 year, it should be classified as Doubtful Asset – up to 1 year (D1). Provision is required at 25% on the secured portion and 100% on the unsecured portion. Therefore, provision on secured portion of ₹ 90 lakhs would amount to ₹ 22.5 lakhs, while unsecured portion of ₹ 30 lakhs would require full provision of ₹ 30 lakhs, resulting in total provision requirement of ₹ 52.5 lakhs. The advance granted to M/s Crest Infrastructure amounting to ₹ 200 lakhs, secured by assets valued at ₹ 120 lakhs, had remained doubtful for 30 months. Since the doubtful period is more than 1 year but less than 3 years, the asset should be classified as Doubtful Asset – 1 to 3 years (D2). Provision is required at 40% on the secured portion and 100% on the unsecured portion. Therefore, provision on secured portion of ₹ 120 lakhs would amount to ₹ 48 lakhs, while unsecured portion of ₹ 80 lakhs would require full provision of ₹ 80 lakhs. Hence, the total provision required would be ₹ 128 lakhs. The advance granted to M/s Delta Exports remained doubtful for more than 5 years and therefore falls under Doubtful Asset – more than 3 years (D3). In such cases, provision is required at 100% on both secured and unsecured portions. Hence, the entire outstanding amount of ₹ 150 lakhs requires provision. Further, where loss has been identified by the bank, internal auditor, external auditor, or regulator but the amount has not yet been written off, the asset is treated as a Loss Asset requiring 100% provision. Therefore, the advance of ₹ 50 lakhs granted to M/s Eagle Industries should be classified as a Loss Asset and fully provided for. Thus, the bank is required to make adequate provisions in accordance with prudential norms relating to income recognition, asset classification and provisioning, failing which profits and advances would be overstated in the financial statements.