Mere classification of borrowings as NPAs by banks doesn’t relieve the company from interest: NFRA clarifies

During a disciplinary action under section 132(4) of the Companies Act, 2013, NFRA found that several companies discontinued recognition of interest expense on their bank borrowings that has been classified as NPA by the lender banks and for which the company was negotiating One Time Settlement with the banks. This accounting treatment resulted in contravention of provisions of applicable accounting standards.

Such discontinuation of interest expense recognition on bank borrowings solely based on the classification of the company’s borrowings as NPAs by the lender banks in the payment of interest/ principal without evidence of the legally enforceable contractual documents results in incorrect/erroneous presentation of financial performance and financial position of the borrowing company to its shareholders, investors, creditors, and lenders.

In this regard, NFRA issued a circular on 20.10.2022 on this subject to draw the attention of all companies, audit committees, and statutory auditors and clarified that mere classification of the borrowings as NPAs doesn’t relieve liability to pay interest and principal.

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