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Prudential Treatment of Bad and Doubtful Debt Reserve by Co-operative Banks

Reserve Bank of India (RBI) has issued guidelines on prudential treatment of bad and doubtful debt reserve by Primary (Urban) Co-operative Banks (UCBs), State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs).

What violations are observed in treatment of bad and doubtful debt reserve?

  • Several co-operative banks have created Bad and Doubtful Debt Reserve (BDDR). While in some cases, BDDR is created by recognising an expense in the Profit and Loss (P&L) Account, in other cases it is created through appropriations from net profits.
  • In terms of Accounting Standard (AS) 5, all expenses which are recognised in a period should be included in the determination of net profit or loss for the period. Not recognising the required provisions for Non-Performing Assets (NPAs) as an expense while arriving at the net profit in the P&L Account is not in consonance with extant Accounting Standards. 
  • The treatment of BDDR for regulatory capital and reckoning of net NPAs varies across banks and in many cases has been observed to be at variance with regulatory norms.

What are the revised guidelines on treatment of bad and doubtful debt reserve?

To bring about uniformity in the treatment of BDDR for prudential purposes, revised instructions on BDDR are being issued, as under –

  • With effect from the FY 2024-25, all provisions as per Income Recognition, Asset Classification and Provisioning (IRACP) norms, whether accounted for under the head ‘BDDR’ or any other head of account, shall be charged as an expense to the P&L account in the accounting period in which they are recognised. The eligibility of such provisions for regulatory capital purposes shall continue to be as per the extant guidelines on capital adequacy.
  • After charging all applicable provisions as per IRACP norms and other extant regulations to the P&L Account, banks may make any appropriations of net profits (below the line) to BDDR, if required.
  • As a one-time measure, the following regulatory treatment is prescribed –
    • The balances in BDDR as on March 31, 2024, representing provisions as per IRACP norms (that have been created by directly appropriating from net profits instead of recognising as an expense in the P&L Account) in the previous years (referred to as ‘BDDR2024’) shall be identified and quantified.
    • As at March 31, 2025, to the extent of BDDR2024, an appropriation shall be made directly (below the line) from the P&L Account or General Reserves to provisions for NPA (i.e. liability). Such provisions shall be permitted to be netted off from GNPAs to arrive at NNPAs.
    • To the extent the balances in BDDR are not required as per applicable statute, the same can also be transferred to General Reserves / Balance in P&L Account (below the line).
    • After passing the above entries, the balances in the BDDR can be reckoned as Tier 1 capital. However, balance in the BDDR shall not be reduced from Gross NPAs to arrive at Net NPAs.


References

Reserve Bank of India. (2024, August 02). 'Prudential Treatment of Bad and Doubtful Debt Reserve by Co-operative Banks'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12716&Mode=0


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