The Reserve Bank of India (RBI) has introduced new rules to standardize how cooperative banks handle bad loans, known as non-performing assets (NPAs). This move aims to ensure consistency in managing the Bad and Doubtful Debt Reserve (BDDR), which is money set aside to cover potential losses from bad loans.
These revised norms apply to Urban Co-operative Banks, State Cooperative Banks, and Central Co-operative Banks, effective immediately. Here are the key points explained in simple terms:
- Recording Provisions as Expenses: Starting from the financial year 2024-25, any money set aside for bad loans (provisions) must be recorded as an expense in the Profit & Loss (P&L) account during the year they are recognized. The P&L account is a financial statement that shows a bank’s revenues and expenses.
- Capital Adequacy: The amount of money banks need to keep aside for safety (regulatory capital) will continue to follow existing rules. Capital adequacy ensures banks can absorb a reasonable amount of loss and protects depositors.
- Transition Measures: In the past, some banks might have made provisions by taking money from their net profit instead of recording it as an expense. By March 31, 2024, banks should identify and calculate these past provisions.
- Making Provisions Directly: By March 31, 2025, banks should make provisions directly from the P&L Account or General Reserves (another part of their financial statements). These provisions can be subtracted from Gross NPAs (total bad loans) to calculate Net NPAs (bad loans after provisions).
- Handling BDDR Balances: Any money in the BDDR that is not needed for provisions can be moved to General Reserves or the P&L Account. After following these steps, the remaining balances in the BDDR can be considered as Tier 1 capital, which is the core capital of the bank. However, this balance should not be subtracted from Gross NPAs to determine Net NPAs.
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