Interest on npa account - bank

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

05 May 2012 Hi,

can anyone tell how to provide the Interest payable on NPA account of Bank. Is it necessary to provide it in the books of company?

Amol Gopal Kabra (CA,CS,DISA)

Amol Gopal Kabra (CA,CS,DISA) (Expert)
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05 May 2012 No. You have to provide for the interest only when it is provided by the bank.

Querist : Anonymous

Querist : Anonymous (Querist)

07 May 2012 Dear Sir,

Bank is providing the interest in the previous year and reversing it in the next year. in such situation what we need to do as company?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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01 August 2024 When dealing with Non-Performing Assets (NPA) in a company's accounts, especially regarding interest payable on an NPA account from a bank, here’s how you should handle it:

### **Accounting for Interest on NPA Accounts:**

**1. **Understanding NPA Interest Treatment:**

- **Bank Perspective:** From the bank’s perspective, interest on NPA accounts is often accrued in the year it is due but may be reversed in the next year if the loan remains classified as NPA. This practice aligns with the prudential norms of banks.

- **Company’s Perspective:** As a company, if you have a loan that is classified as an NPA, you need to account for the interest expense appropriately. This includes:

**2. **Recording Interest Payable:**

- **Accrual Basis:** Under the accrual basis of accounting, interest payable on NPA accounts should be recorded as an expense in the books of accounts in the period it is incurred, irrespective of whether it is actually paid or not.

- **Provision for Interest:** If the interest on the NPA is accrued but not paid, it should be provided for in the financial statements. This involves:

- **Debiting the Interest Expense Account:** Record the interest payable as an expense in the Profit and Loss Account.
- **Crediting the Interest Payable Account:** Recognize the liability in the Balance Sheet.

**3. **Dealing with Reversal by the Bank:**

- **Interest Accrual by Bank:** If the bank accrues interest in one year and reverses it in the next year due to the NPA status, you should:

- **Adjust Your Books:** Match the interest expense recorded with the bank's adjustment. If the bank reverses the interest, ensure that your books reflect the accurate interest expense for the period.

- **Disclosures:** Ensure that you disclose any significant adjustments or reversals related to NPAs and interest in your financial statements.

**4. **Provisions under Accounting Standards:**

- **AS 29 (Provisions, Contingent Liabilities, and Contingent Assets):** If the interest on the NPA is likely to be waived or adjusted by the bank, you should make provisions for the same as per AS 29.

- **IFRS/Ind AS:** If following IFRS or Ind AS, similar principles apply where interest on NPAs should be accrued based on contractual terms but adjusted for any expected credit losses.

### **Example:**

- **Year 1:**
- Accrued interest on NPA: ₹10,000
- Record in books:
- Debit Interest Expense: ₹10,000
- Credit Interest Payable: ₹10,000

- **Year 2 (Bank Reversal):**
- If the bank reverses the accrued interest:
- Debit Interest Payable: ₹10,000
- Credit Interest Income (if any) or adjust Interest Expense as per actuals.

### **Summary:**

- **Record Interest Payable:** Interest on NPA should be recorded as an expense in the period it is incurred.
- **Adjust for Bank Reversals:** Match your records with the bank’s adjustments and ensure accurate financial reporting.
- **Follow Standards:** Adhere to relevant accounting standards (AS/IFRS/Ind AS) for provisioning and adjustments.

Consulting with an accounting professional or auditor is advisable for ensuring compliance with specific regulations and for tailored advice based on your situation.

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