Banks Must Fully Automate NPA Classification By June 2021: RBI

The Reserve Bank of India has reiterated that banks must fully automate the classification of a borrower’s account as a non-performing asset and the calculations of provisions to be made against these advances.

The banking regulator said this must be completed by June 2021, according to a notification on its website.

While the automation of asset classification was first prescribed in 2011, the RBI said it has “observed that the processes for NPA identification, income recognition, provisioning and generation of related returns in many banks are not yet fully automated. Banks are still found to be resorting to manual identification of NPA and over-riding the system generated asset classification by manual intervention in a routine manner”.

The regulator has now prescribed a tougher framework to ensure that any manual intervention remains limited. Such intervention has been detected in cases such as that of PMC Bank, where bad loans were not appropriately tagged.

As per the new rules:

• All borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, shall be covered in the automated IT based system.
• Asset classification rules shall be configured in the system, in compliance with the regulatory stipulations.
• Calculation of provisioning requirement shall also be system-based as per pre-set rules for various categories of assets, value of security as captured in the system.
• In addition, income recognition or derecognition in case of impaired assets shall be system driven and amount required to be reversed from the income account should be obtained from the system without any manual intervention.
• The system shall handle both downgrade and upgrade of accounts without manual intervention.
• Banks must ensure that asset classification must be updated on a daily basis on the system.
• Manual intervention maybe allowed only in exceptional circumstances after two levels of approvals through a board approved process.
• All manual intervention must be made at central office level, should have trail recorded and should be available for auditor review.

As part of its guidelines, the RBI said the automation of NPA classification and adherence to other norms shall be subject to supervisory assessment of the regulator. Any non-adherence shall lead to supervisory or enforcement action initiated against the concerned bank.