RBI Orders Automation of NPA Recognition

In August 2011, RBI advised banks to automate the process for the recognition of NPAs, but banks still resort to manual identification.

So, now RBI has released a circular that requires banks to update their IT systems such that it automates the process of asset classification (classification of advances/investments as NPA/NPI and their up-gradation), Provisioning calculation, and Income Recognition processes by 30 June 2021.

Which banks are supposed to follow this?

Which assets to consider for the automation?

How is it going to be beneficial for the system?

As per the circular, it applies to all Scheduled Commercial Banks (excluding RRBs) and all Small Finance Banks. Earlier in August 2011 RBI had advised banks to do the same and now here again it has asked the banks to completely automate the process.

As an overhaul of the IT systems, RBI has asked banks to upgrade their systems to conform to the guidelines provided.

The process of automation will apply to all the assets i.e., all borrower accounts that include temporary overdrafts as well, irrespective of their size, type of limits, or sector to which it belongs. It includes investments of Banks as well. All of the processes for asset classification rules, calculation of provisioning, or income recognition/derecognition as per regulations should be configured into the system.

As far as the frequency of conducting this process is concerned, Banks are advised to keep this as an ongoing exercise for both up-gradation or down-gradation of the accounts, also ensuring asset classification status is updated as part of the day end process.

The circular sure tries to ensure there is no manual intervention in the process, but there are certain exceptions provided. In cases where the Bank resorts to manual intervention, it must have at least two-level authorization. Also, such interventions should have appropriate audit trails and details of such intervention should be logged for a minimum period of three years.

The important aspect to note here is that adherence to these instructions will be examined as part of the supervisory assessment of the Banks and in case of non-compliance, enforcement action will be taken against the concerned bank.

Including this into supervisory assessment is going to ensure Banks adhere to these guidelines and thus it is going to bring more transparency in the system.

As we have already seen in Yes Bank’s case, NPAs were under-reported for a long period that led to such a chaotic situation for it, similarly, manual intervention by Banks may have been resulting in under-reporting of NPAs which may result into similar situations. Complete automation is going to ensure NPAs are reported correctly, reduce manual labor thereby bringing in more transparency in the system!