Q. CLASSIFICATION OF ADVANCE

Question

Dear Sir

While verification of a Cash Credit Account in bank branch audit having limit of Rs. 500 Lakhs, we observed as under:

1.     During last six months, the account was overdrawn from 01.10.2022 to 21.12.2022 and again from 31.12.2022 to 29.03.2023 i.e out of 182 days, the account was overdrawn in 171 days. On 31.03.2023, the balance outstanding is below limit.

2.     There is no healthy turnover in account and frequency and the amount of credits in the account are not commensurate with the sanctioned limit. In last six months, only in the month of December certain payment received from a Debtor and repaid to a Creditor. Other than that, in six months only cash and certain payments received from related parties to serve the interest only.

3.     The unit is closed. The branch letter dt.  13.03.2023 to borrower mentioned that `This bears reference to visit of our officials at your manufacturing unit on 24.02.2023, where the unit was found closed for production since mid-January’ 2023 and subsequent discussion held with you in the matter.

4.     On 06.04.2023, the chief manager also telephoned to director and he confirmed that unit is still closed.

5.     The above letter sent through speed post at factory address returned undelivered on 25.03.2023 with remark `The unit is closed, as such returned to sender’.

6.     The above letter sent through speed post at Delhi office address returned undelivered on 20.03.2023 with remark `No such person’.

7.     As per GST returns of borrower, the sales during the month of December’ 2022 was Rs. 72.99 Lakhs, during January’ 2023 was Rs. 15.72 Lakhs and during March’ 2023 was just Rs. 0.57 Lakhs, which also clearly indicates that company is not working.

8.     The regular renewal of account is pending. The short review was made by branch on 17.10.2022, which is yet to be confirmed by R.O. Further, as per Note No. 7 of short review `The facility has been proposed for short review on technical reasons as borrower a non-cooperative and does not submitted financials/CMA data for rating and review purpose. This shows that regular renewal of account is not underway.

In the circumstances mentioned above, when unit is closed since last three months:

1.     That the stock is not verified by inspecting team, hence the quantity/quality/ value and adequacy of stock is not ascertainable. Moreover, in pharma unit, the expiry date of material is very crucial. In above circumstances, the old/expired/obsolete/unsalable stock is also not ascertainable. Therefore, drawing power is unascertainable in such case. Moreover, as the unit is closed since more than three months, the chances of realisable stock (primary security) to cover the drawing power is almost negligible.

2.     That only certain credit is made in account before balance sheet date.

3.     That the closure of factory is major weakness and as per records, this is not temporary in nature.

Kindly confirm that whether on the basis of facts mentioned in above paras (on the basis of weakness in account), as per para 4.2.6 of the RBI Master Circular, the account should be classified as N.P.A. 

Thanks