All the banks were directed by the Reserve Bank of India to introduce an automated IT-based system for asset classification and provisioning calculation and Income Recognition processes.

On Monday this week, the Reserve Bank of India (RBI) provided some guidelines to the banks to ensure the completeness and integrity of the automated Asset Classification (classification of advances/investments as NPA/NPI and their upgradation), Provisioning calculation and Income Recognition processes, and these guidelines are to be upgraded in the bank’s system latest by June 30, 2021.

In a circular, the RBI said in August 2011 banks were advised to put in place appropriate IT systems for identification of non-performing assets (NPAs) and generation of related data and returns, both for regulatory reporting and bank’s own management information system (MIS) requirements. It is, however, observed that the processes for NPA identification, income recognition, provisioning and generation of related returns in many banks are not yet fully automated, the RBI said.

RBI’s guidelines for automated IT-based system for banks will provide the coverage for the following topics-

  1. All borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, shall be covered in the automated IT-based system (System) for asset classification, upgradation, and provisioning processes. Banks’ investments shall also be covered under the System.
  2. Asset classification rules shall be configured in the System, in compliance with the regulatory stipulations.
  3. Calculation of provisioning requirement shall also be System based as per pre-set rules for various categories of assets, the value of the security as captured in the System and any other regulatory stipulations issued from time to time on provisioning requirements.
  4. Also, income recognition/derecognition in case of impaired assets (NPAs/NPIs) shall be system driven and the amount required to be reversed from the income account should be obtained from the System without any manual intervention.
  5. The System shall handle both down-grade and upgrade of accounts through Straight Through Process (STP) without manual intervention.

Bank’s IT-based asset classification system shall be an ongoing exercise for both down-gradation and up-gradation of accounts and only the banks have to ensure that status of the asset classification is updated as part of the day end process. 

Due to this new system, the banks will be able to generate classification status report at any given point of time with the actual date of classification of assets as NPAs/NPIs.

Exceptions may be granted from system driven classification in certain circumstances, which are expected to be minimum and temporary, subject to certain conditions.

Reserve Bank also notified that the banks may draw up their standard operating procedure (SOP) for System based NPA classification for usage by the operating staff.

RBI also added, “Banks shall keep the business logic and other parameters/configurations of the System updated to ensure that the System based identification, classification, provisioning and income recognition are strictly in compliance with the regulatory guidelines on an ongoing basis. There should be periodic system audit, at least once in a year, by Internal / External Auditors who are well versed with the system audit both on system parameters as also from the perspective of compliance to Income Recognition, Asset Classification and Provisioning guidelines.”

With Warm Regards,

CL Bureau.

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