Damaged or Expired Stock: Updating Your Bank Stock Report
Damaged or expired inventory? What to remove from your bank stock statement, a ₹50 lakh drawing power example, insurance claims and GST ITC reversal.
In this article (9 sections)
When stock financed by your bank is damaged, expires or becomes unsaleable, remove it from eligible stock in your next stock statement (or show it separately at salvage value), inform the bank in writing, and start the insurance claim with the bank's interest noted. Your drawing power will fall, so plan how to cover any gap before the account goes out of order. Done promptly, a stock loss is an insurance and accounting event; hidden, it becomes a credibility problem with your lender.
The figures below are illustrative. Your hypothecation deed, sanction letter and insurance policy set the exact obligations.
First 48 hours: a checklist
- Make the site safe and stop further loss. Move undamaged stock, cover goods, isolate expired batches.
- Record everything: photos and videos with dates, item-wise list with quantity, batch number and expiry date, cause (fire, flood, leakage, pest, expiry, breakage) and location.
- Inform the insurer in writing within the time the policy requires; many policies expect immediate intimation and allow a survey before damaged goods are disposed of.
- Inform the bank in writing: what happened, estimated value, insurance claim status and the effect on the next stock statement.
- Get official reports where relevant: fire brigade report for fire, police FIR for theft, municipal or weather records for flood.
- Do not destroy or sell damaged stock until the surveyor has seen it, unless the insurer agrees in writing.
Expired goods with no insurance claim, such as date-expired food or medicines, still need steps 2 and 4, plus the supplier's return or credit note process if one exists.
What changes in the stock statement
| Item | How to show it |
|---|---|
| Destroyed stock | Remove completely |
| Damaged but saleable at a discount | Show separately at realistic salvage value, marked "damaged" |
| Expired, with supplier return or credit note expected | Remove from stock; the credit note is not a trade receivable for drawing power unless your bank agrees |
| Expired, to be destroyed | Remove; keep destruction records |
| Insurance claim receivable | Do not add to stock; disclose separately |
Under RBI's asset classification directions for commercial banks, drawing power must be based on a current stock statement that is not older than three months, and inflated figures are what stock audits are designed to catch. To avoid over-buying that ends in expired stock, see our guide to inventory planning for a seasonal business.
Worked example: a ₹50 lakh distributor
Kapoor Pharma Distributors, illustrative figures. Cash credit limit ₹45 lakh; 25% margin; outstanding ₹40 lakh.
Before the loss: stock ₹50 lakh, receivables under 90 days ₹20 lakh, trade creditors ₹14 lakh.
- DP = (₹50 lakh + ₹20 lakh − ₹14 lakh) × 75% = ₹56 lakh × 75% = ₹42 lakh
The loss:
- Expired batches at cost: ₹3 lakh. The manufacturer will issue a credit note for about ₹1.8 lakh after return.
- Water damage from a roof leak: ₹6 lakh at cost. About ₹1 lakh can be sold as salvage.
After the loss:
- Stock = ₹50 lakh − ₹3 lakh − ₹6 lakh + ₹1 lakh salvage = ₹42 lakh
- DP = (₹42 lakh + ₹20 lakh − ₹14 lakh) × 75% = ₹48 lakh × 75% = ₹36 lakh
Drawing power falls by ₹6 lakh, and the ₹40 lakh outstanding is now ₹4 lakh above DP.
Closing the gap
- The insurer settles the water-damage claim. Suppose the assessed loss is ₹5 lakh (₹6 lakh minus ₹1 lakh salvage) and the policy deductible is ₹50,000, so the claim is ₹4.5 lakh. Paid into the cash credit account, it brings the outstanding to ₹35.5 lakh, below the ₹36 lakh DP.
- Claims can take weeks or months. If the survey is delayed, bridge the gap with collections or owner's funds and tell the bank the expected claim date.
Watch for under-insurance
If stock worth ₹50 lakh was insured for only ₹40 lakh, most stock policies apply an average clause: the claim is reduced in proportion, here to 80%. The ₹5 lakh assessed loss would then pay about ₹4 lakh before the deductible, leaving a bigger gap. Insure stock for its full value, especially at peak season, and review the sum insured whenever stock levels change.
GST: input tax credit on lost or expired goods
Section 17(5)(h) of the CGST Act blocks input tax credit on goods that are lost, stolen, destroyed or written off. In practice:
- Destroyed or written-off goods: reverse the ITC you claimed on them. In the example, if the ₹6 lakh of damaged stock carried GST at an illustrative 5%, about ₹30,000 of ITC would be at stake, adjusted for any part that is sold as salvage.
- Expired goods returned to the supplier: the supplier's credit note usually adjusts the tax; check the GST treatment with the supplier.
- Partly damaged goods sold at a discount: treatment depends on facts, and advance rulings have differed.
Work this out with your GST practitioner before filing the return for the month, and keep the working with your records.
Documents to give the bank
- Loss intimation letter (date, cause, estimated value)
- Revised stock statement with damaged and expired items removed or shown at salvage value
- Insurance claim intimation, surveyor's report and settlement letter when received
- Photos, item-wise loss list with batch and expiry details
- Fire brigade report or FIR, if relevant
- Supplier return confirmation or credit notes for expired goods
- Destruction certificate or disposal records for goods that must be destroyed
- Accounting entries for the write-off and GST reversal working
What to ask the bank
- Will you accept salvage stock at a realistic value, and at what margin?
- Can the insurance claim be credited directly to the cash credit account?
- Is a short ad hoc limit or a temporary relaxation possible while the claim is processed?
- Will a special stock inspection be done, and what will it cost?
- If the loss is large, can part of the shortfall be converted into a short-term loan? Our guide to loan restructuring options explains how that works.
Common mistakes
- Leaving damaged stock in the statement at cost "until the claim comes".
- Not informing the bank, then finding the insurer's cheque is issued with the bank's name and you need its consent anyway.
- Disposing of goods before the survey, which can weaken the claim.
- Forgetting the GST reversal, which can lead to interest and penalty later.
- Under-insurance that reduces the claim through the average clause.
- Treating expiry as a one-off. Repeated expiry means ordering too much; a first-expiry-first-out system and monthly expiry review prevent it.
How to escalate
- Insurance claim delayed or rejected: write to the insurer's grievance officer. If unresolved, register on IRDAI's Bima Bharosa portal (bimabharosa.irdai.gov.in). Sole proprietors and micro enterprises can also approach the Insurance Ombudsman (cioins.co.in), subject to the rules' conditions.
- Bank not crediting the claim, not updating drawing power or levying unexplained charges: complain to the bank's grievance cell; if unresolved after 30 days, file on cms.rbi.org.in under the Reserve Bank – Integrated Ombudsman Scheme, 2026 within 90 days. See what to do when the bank is not resolving a complaint. The Ombudsman does not review the bank's commercial decision on your limit.
Key takeaways
- Remove destroyed and expired stock from the statement; show damaged saleable stock separately at salvage value.
- Inform the insurer and the bank in writing within days, with photos and an item-wise list.
- In the example, a ₹9 lakh stock loss cut drawing power by ₹6 lakh; the insurance claim paid into the account closed the gap.
- Insure stock for its full value to avoid the average clause.
- Reverse GST input tax credit on lost or destroyed goods with your practitioner's help.
Frequently asked questions
Should damaged or expired stock be shown in the bank stock statement?
No, not at its original value. Remove it from eligible stock, or show it separately at salvage value if it can still be sold. Including unsaleable stock overstates your drawing power and will be found in a stock audit or inspection.
Do I need to inform the bank if hypothecated stock is damaged?
Usually yes. Hypothecation agreements typically require you to inform the bank promptly of any loss or damage to the secured stock, and stock insurance for bank-financed goods usually names the bank, so the bank is involved in the claim. Check the exact clause in your hypothecation deed and sanction letter.
Who receives the insurance claim for hypothecated stock?
When the bank's interest is noted on the policy, claim payments are typically made to the bank or with its consent, and are credited to your cash credit account. This reduces your outstanding, which helps restore the gap between drawing power and balance.
Do I need to reverse GST input tax credit on damaged or expired goods?
Generally yes. Section 17(5)(h) of the CGST Act blocks input tax credit on goods lost, stolen, destroyed or written off. How it applies to partly damaged goods sold at a discount or expired goods returned to the supplier depends on facts, so work it out with your GST practitioner.
What if the stock loss pushes my account above drawing power?
Tell the bank in writing with a plan to regularise, such as the expected insurance claim, owner's funds or collections. A cash credit account that stays above the limit or drawing power continuously for 90 days is treated as out of order and can become an NPA, so act within weeks, not months.
This article is for general education and is not personalised financial, tax or legal advice. Rates and rules are as of 31 Oct 2026; confirm current terms with your lender, AMC or a qualified adviser.
