## Window Dressing: Artificial Regularisation of Borrower Accounts

### The Risk

Borrowers or bank officials may arrange temporary credits into loan accounts just before the financial year-end to make accounts appear 'regular' (not NPA), followed by reversals shortly after the balance sheet date. This practice — known as window dressing — artificially inflates the quality of the loan portfolio.

### RBI Guidance

RBI norms require that asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date must be handled with care and without scope for subjectivity. Where the account shows inherent weakness based on available data, it should be deemed NPA despite the apparent regularisation.

### Audit Procedure

The statutory auditor should:

1. Select a sample of transactions immediately before the financial year close AND immediately after the close.

2. Examine whether these transactions are related to each other (e.g., a credit followed shortly by a reversal or withdrawal).

3. Determine whether any transactions in the first few days after closing reverse pre-year-end credits.

4. If such a pattern is found, classify the account as NPA irrespective of the closing balance shown on the balance sheet date.

> Auditor's Judgment: The test is not whether the balance was within limits on 31 March — it is whether the credit reflected genuine economic activity or was merely an arrangement to avoid NPA classification.

Worked example

### Example 1

Scenario (Q6): Sidharth Industries — Reversal After Year-End

Facts: Outstanding loan ₹50L as on 31 March 2024. On 29 March 2024, payment of ₹10L reduces balance to ₹40L. On 4 April 2024, Sidharth Industries reverses ₹8L, restoring the balance to ₹48L.

Audit Response (Mahavir and Associates):

1. The payment (₹10L credit on 29 March) and the reversal (₹8L on 4 April) are closely linked in time and amount.

2. The net effect is that the end-of-year balance was artificially reduced for one trading day to present a better position.

3. The auditor should assess whether this pattern indicates an arrangement to prevent the account from slipping into NPA.

4. If the underlying account shows inherent weakness (e.g., prolonged low activity, interest debits exceeding credits), the account should be classified as NPA in compliance with regulatory guidelines, regardless of the apparent 31 March balance.

⚠️ Common exam mistakes

Accepting the balance sheet closing balance at face value without reviewing post-balance-sheet transactions for reversals.
Treating the single large credit before year-end as evidence of genuine repayment without enquiring into the source and subsequent movement of funds.
Failing to apply judgment about 'inherent weakness' — if the account has been consistently stressed throughout the year, one payment does not cure the underlying NPA risk.
Limiting transaction review only to the borrower's loan account — the auditor should trace where the credit came from (e.g., another account of the same group) to detect circular transactions.

Bare-Act text Accounts Regularised Near the Balance Sheet Date · RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning · click to expand

Asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as NPA.

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Accounts Regularized Near Balance Sheet Date — Window Dressing Risk

Worked example

⚠️ Common exam mistakes