1.18     Query

Classification of loans in balance sheet

1.A state government company within the meaning of Section 617 of the Companies Act, 1956, is involved in rendering financial and other assistance for setting up industries in the under-developed parts of the state.

2.The company has borrowed, on long term basis, inter alia, from the Unit Trust of India (UTI) (Rs. 25 lacs) and General Insurance Corporation of India (GICI) and its subsidiaries (Rs. 1.00 crore) for the purpose of carrying on its business. These loans have been guaranteed by a bank. The company has not offered any other security to the lenders in respect of these loans. However, the company has hypothecated to the said bank, Term Loans (aggregating to Rs. 256.40 lacs as on 20.6.1985) granted to its various borrowers, as a security in consideration of the said bank guaranteeing the loans. This has been disclosed as a foot-note to the relevant schedule attached to the balance sheet as at 30.6.1985.

3.The querist has drawn the attention of the Expert Advisory Committee to its earlier opinion, published on page 197, in the September, 1984 issue of the ‘The Chartered Accountant’, according to which, loans not secured by tangible security are to be classified as ‘Unsecured Loans’ for the purpose of classification in the balance sheet. In the present case, tangible security in the shape of hypothecation of the loans has been given not to the lenders but to a guarantor bank.

 4.The querist has sought the opinion of the Expert Advisory Committee on whether, under the circumstances, the said loans taken by the corporation should be classified as ‘Secured’ or ‘Unsecured’. At present, the company is following the practice of classifying these loans as ‘Unsecured’ on the consideration that no tangible security has been offered directly to the lenders as such.

                                                           Opinion                                                             May 19, 1986

1.The Committee assumes that the term loans offered by way of security to the bank are secured loans.

2.The Committee notes that the facts of the query pertaining to the opinion referred to by the querist in para 3 of the query are different from the present query, since in the former case no tangible security was given by the borrower, whereas, in the present case tangible security has been given to the guarantor.

3.The committee further notes that the Statement on Auditing Practices (1983) (Page 47), issued by the Research Committee of the Institute of Chartered Accountants of India, has recommended in para 9.4 (b) as below:

“In some cases, loans are guaranteed by third parties in whose favour the assets of the company are mortgaged. The classification of such loans, as secured or unsecured, has not been uniform. It is recommended that having regard to the substance of the transaction, such loans be classified as secured, with appropriate disclosure of the fact that the security is given not to the lender, but to the guarantor.”

 

4.On the basis of the above, the Committee is of the opinion that the loans in respect of which tangible security has been given to the guarantor, should be classified as ‘secured loans’, with appropriate disclosure that the security is given not to the lender, but to the guarantor.

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