Loan recast: Banks gear up for marathon talks with auditors

Audit firms want lenders to declare that proposals received before March 31 have been approved in principle.

Banks are bracing for multiple rounds of discussions with their auditors over the treatment of restructured accounts under the Reserve Bank of India’s (RBI’s) special regulatory treatment for such accounts.

The banking regulator had permitted banks to classify loans that were standard at the start of September 2008 in the same category despite taking them up for restructuring by March 31. In normal course, banks would have had to classify such loans as non-performing assets (NPAs).

According to the scheme, any loan taken up for restructuring by the March 31 deadline can be restructured within 120 days.

While bankers want to classify all proposals received by them before the deadline as standard assets, auditors want bank managements to say that the proposals have been approved in principle and the accounts will be rescheduled within 120 days.

“A competent authority needs to issue a certificate saying that we have taken up the issue and we will restructure the loans. Otherwise, they will escape making a provision during the fourth quarter and may not restructure the loans later,” said an executive with a large audit firm.

“The RBI circular issued in February is creating some confusion. It is not clear if just receipt of an application is sufficient to treat an asset as standard,” said a bank executive.

Another banker said that a large number of proposals came up towards the end of March and a call was being taken. “You need time to decide since a company’s performance needs to be assessed before we take a final call,” he said.

A banker said that the confusion would give some auditors an opportunity to put pressure on bank managements.

On its part, the Institute of Chartered Accounts of India (ICAI) has advised auditors to deal such issues with caution and ensure that banks make adequate provisions for NPAs, wherever required.

While asking them to carry out statutory audit in line with applicable accounting standards and guidance notes on bank audits, ICAI said that audit reports should clearly mention the extent of non-provisioning and the impact of inadequate provisions in the financial statement.

In addition, the long-form audit report – the detailed report which is submitted to the management and not available to the public – should also provide details of advances where the auditor disagreed with the classification of a loan as standard, sub-standard, doubtful or a loss asset.