RBI directs the banks for automation of NPA recognition system

RBI's latest directions to banks for putting in place system for automation of NPA recognition latest by 30th June 2021.

Highlights of the circulars :-

1. RBI referring its earlier circular DBS.CO.PPD.No.1950/101.005/2011-12 dated 4th August 2011 in which it had advised banks to have appropriate IT system in place for identification of NPA (Non performing Asset) but it has been observed that bank has still not developed such instructed system.

2. It would cover all borrower account

3. Frequency of system based asset classification shall be on going exercise, banks to ensure updation asset classification as a day end process

4. Certain exception to above mentioned process :

• Where manual intervention is required to override system classification but to have at least two level authorizations (enpowered by Board approval & also placed before audit committee/audit head).
• Bank to maintain log of above manual intervention.

5. System requirement & System audit – whether bank is using separate system for NPA classification then it should be fetching data from CBS & bank to follow all other compliances as usual (i.e system audit, provisioning & income recognition norms etc)

6. General : bank to have SOP for system based NPA classification for usage by operating staff.

[for detailed guidance kindly refer RBI circular Ref. No. DoS.CO.PPG./SEC.03/11.01.005/2020-21 dated 14th Sep 2020]

My take on the above action of the RBI :-

1. Earlier it was observed that due to lack of automated NPA recognizing system an account considered as standard until Statutory auditor or Concurrent auditor recognizes it as NPA.

2. Financial Effect can be understood through this example for FY 2019-20 as:-

• Loan which is having outstanding balance as Rs. 110/-(as on 31.03.2020)
• Interest recorded on above in year Rs 10/- (@10%) (FY 2019-20)
• Income Tax(IT) paid by Bank Rs 3/-(@30% assumed) (AY 2020-21)
• Now bank has paid IT on wrongly identified income (i.e cash outflow of Rs 3/-)
• Overstatement of Balance Sheet.
• Requisite actions delayed on such loan account until it gets notified as NPA.

3. Now these kind of wrong tactics will be avoided owing to the above circular of the RBI.