Provision for loans that are under Revenue Recovery

This query is : Resolved

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Under AS 9, interest on defaulted loans under recovery should not be recognized until collection is certain; collateral is not enough. Lack of provision overstates profit. If 50 50 NBFC criteria met, RBI registration is mandatory; non compliance invites penalties.

Arun Jyothy.K

Arun Jyothy.K (Querist)
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14 April 2026 As per Para 11(b) of Accounting Standard-9 on Revenue Recognition issued by ICAI, revenue should be recognised only when there is no significant uncertainty regarding its ultimate collection. In cases where the loanee has defaulted, and the loan has been referred for Revenue Recovery proceedings, the collectability of interest and penal interest becomes uncertain. However, the company has been consistently following the practice of recognising the revenue on those loan accounts which are referred to RR on the pretext that they have sufficient collateral, even when qualified by the CA. No provision has been created for the above-mentioned loan, which is again qualified by the CA. Further, the company is not registered under NBFC, even when the net owned fund exceeds Rs. 10 crore, which is again qualified by CA. Please clarify

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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14 April 2026 Under AS 9, Para 13, revenue from interest should only be recognised when there is no significant uncertainty as to its measurability or collectability.
Postponement of Revenue: Since the loanee has defaulted and Revenue Recovery (RR) proceedings have begun, the ultimate collection of interest is inherently uncertain. Para 9.2 of AS 9 explicitly states that if ultimate collection is not reasonably certain, recognition should be postponed until it becomes certain.
The "Collateral" Pretext: The company's argument that "sufficient collateral" justifies recognition is generally invalid for revenue recognition under AS 9. AS 9 focuses on the certainty of the inflow of the consideration itself. Recognition of interest on a non-performing asset (NPA) should ideally be on a cash basis, meaning only when actually received.
Provisioning: Para 9.3 notes that if uncertainty arises after recognition, a separate provision should be made. By failing to create a provision and continuing to recognize income, the company is overstating its profits.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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14 April 2026 A company meeting the Principal Business Criteria (PBC) must register with the RBI under Section 45-IA of the RBI Act, 1934.
Registration Threshold: New NBFCs must have a minimum Net Owned Fund (NOF) of ₹10 crore to commence business as of October 1, 2022.
Mandatory Registration: If more than 50% of the company’s assets are financial and more than 50% of its income is from financial activities (the 50-50 test), it must register as an NBFC.
Penalties: Carrying on a non-banking financial business without a Certificate of Registration (CoR) is a criminal offence. It can lead to:
Fines: Up to ₹5 lakhs or double the amount of the violation.
Imprisonment: Directors and responsible persons can face imprisonment for 1 to 5 years.
Operational Bans: The RBI can prohibit the company from accepting deposits or carrying on further business.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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14 April 2026 The fact that the Chartered Accountant (CA) has qualified the audit report on three counts—revenue recognition, lack of provisioning, and non-registration—is a severe red flag.
Material Misstatement: These qualifications indicate that the financial statements do not provide a "true and fair view" of the company's financial health.
Regulatory Scrutiny: Such reports often trigger investigations by the National Financial Reporting Authority (NFRA) or the Registrar of Companies (RoC), and will likely lead to RBI enforcement action for operating an unauthorized NBFC.

Arun Jyothy.K

Arun Jyothy.K (Querist)
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14 April 2026 Thank you very much.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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15 April 2026 You are welcome.

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