## Accounting Treatment of Partial Recoveries in NPAs

### The Core Problem

When a borrower makes partial payments on an NPA without any explicit agreement on how to appropriate the recovery (principal vs interest), the bank must follow a clear accounting policy.

### Rule: Uniform and Consistent Appropriation Policy

In the absence of a clear agreement, banks must:

1. Adopt a written accounting policy for appropriating NPA recoveries

2. Apply it uniformly and consistently across all NPA accounts

### Revenue Recognition — AS 9

Interest income from NPA accounts should be recognised on a cash basis (only when certainty of realisation exists), not on an accrual basis.

Situation	Treatment
Interest partly/fully received in cash from NPA borrower	Can be recognised as income
Amount previously reversed/not recognised	Recognise upon cash receipt
Recovery credited from a fresh/additional credit facility given to the same borrower	Cannot be treated as income — this is circular credit, not genuine recovery

### Auditor's Role

The auditor should verify that:

The appropriation policy is documented and consistently applied
Interest income is not being inflated through circular credit to NPAs

Worked example

### Example 1

CBC Bank Ltd. — Partial Recoveries in NPA Accounts

Facts: CBC Bank received partial payments from NPA borrowers. No explicit agreement existed on appropriation (principal vs interest). The finance team recognised all recoveries as interest income.

Auditor's concern: This treatment may violate RBI norms and AS 9.

Correct treatment:

1. The bank must have a documented, uniform policy for appropriating NPA recoveries.

2. Interest income can only be recognised on a cash basis when realisation is certain (AS 9).

3. Any recovery funded through a fresh credit facility sanctioned to the same borrower cannot be recognised as income — it is not a genuine recovery.

4. Amounts previously de-recognised on accrual basis should be booked as income only upon actual cash receipt.

⚠️ Common exam mistakes

Recognising interest income from NPA accounts on an accrual basis — NPA interest must be recognised only on cash basis
Treating all partial recoveries as interest income without a consistent documented appropriation policy
Counting amounts credited from fresh loans given to the same NPA borrower as genuine interest recovery
Applying different appropriation policies across different NPA accounts — the policy must be uniform and consistent

Reference: AS 9 (ICAI) — AS 9 — Revenue Recognition

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Accounting Treatment of Partial Recoveries in NPA Accounts

Worked example

⚠️ Common exam mistakes