The Reserve Bank of India (RBI) on Monday asked banks to complete the automation of bad-loan recognition and provisioning calculation processes by 30 June. The system-based asset classification will improve efficiency and transparency and will enable the participants (investors, depositors, regulators, etc.) to have enhanced confidence over controls and reporting in this critical area.
"In order 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, banks are advised to put in place / upgrade their systems to conform to the following guidelines latest by June 30, 2021," the RBI notified on Monday.
In a notification issued on Monday, the RBI observed that the processes for non-performing assets (NPAs) identification, income recognition, provisioning, and generation of related returns in many banks are not yet fully automated. It said that banks are still resorting to manual identification of NPAs and also over-riding the system generated asset classification by manual intervention in a routine manner.
Long back in August 2011, the central bank had issued a circular, advising the banks to have appropriate IT systems in place for identifying NPAs and generation of related data/returns, both for regulatory reporting and bank's own MIS (Management Information System) requirements.
Commenting on RBI order to upgrade systems, Himanish Chaudhuri, Partner, Deloitte India said, "This is a much needed step to enhance to strengthen the processes and controls over asset classification and provisioning. While the RBI has been highlighting the same in its various reports to the banks, this current regulation gives it a formal shape. Looking at the regulation, the requirements go well beyond just automating the processes, with need for enhanced governance at an audit committee level on overrides, a framework for internal / external audit on the relevant systems and a host of Information Technology and Security controls."
As per the RBI guidelines, all borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, will be covered in the automated IT based system for asset classification, upgradation, and provisioning processes. Banks' investments will also be covered under the system.
Asset classification rules will be configured in the system, in compliance with the regulatory stipulations. Calculation of provisioning requirement will also be system based as per pre-set rules for various categories of assets, value of security as captured in the system and any other regulatory stipulations issued from time to time on provisioning requirements.
In addition, income recognition or de-recognition in case of impaired assets (NPAs/NPIs) will be system driven and amount required to be reversed from the income account should be obtained from the system without any manual intervention.
"Banks should ensure that the asset classification status is updated as part of day end process. Banks should also be able to generate classification status report at any given point of time with actual date of classification of assets as NPAs/NPIs," it said.
The RBI said that the adherence to these instructions will be examined as part of supervisory assessment of the banks and in case of non-compliance, enforcement action will be taken against the concerned bank.
According to Chaudhuri of Deloitte India, the challenge to adhere to these norms will vary depending upon the maturity of the banks. "While most of the top banks have automated processes, the challenge will be to formalise the framework and demonstrate the governance and control environment on the entire process. On the other hand, for medium and small sized banks, the same needs to be planned well in advance particularly to address the challenges of a multi system environment, data governance and quality issues as well as dependence on external IT vendors," Chaudhuri added.
By Chitranjan Kumar