Skip to main content

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


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Digital Payments – E-mandate Framework 2026

Reserve Bank of India (RBI) has issued e-mandate framework for digital payments. What is an e-mandate?  A mandate is a standard instruction that a customer provides to his / her issuing bank and other institutions allowing them to automatically debit the mentioned amount from his / her bank account. e-mandate is the electronic version of it. To whom shall the framework be applicable? The framework shall be applicable to Payment System Providers and Payment System Participants. To which transactions shall the framework be applicable? The framework shall be applicable to processing of recurring transactions, domestic or cross-border, using cards / Prepaid Payment Instrument (PPI) / Unified Payments Interface (UPI). What are the guidelines for registration and revocation of e-mandate? A customer desirous of opting for e-mandate facility shall undertake a one-time registration process. The mandate shall be registered only after successful validation of additional factor of authenticati...
Post a Comment
Read more

Guidelines to facilitate faster cross-border inward payments

Reserve Bank of India (RBI) has issued guidelines to facilitate faster cross-border inward payments. What is the rationale behind the guidelines? The RBI’s Payments Vision 2025 aims to bring efficiency in the cross-border payments aligning with the G20 roadmap for cross-border payments that has set targets for achieving cheaper, faster, more transparent, and more accessible cross-border payments. One of the challenges with speed of cross-border payments is experienced at the beneficiary leg i.e., the time taken from receipt of the payment at the beneficiary bank till credit to the beneficiary account. What are the guidelines to facilitate faster cross-border inward payments? Banks shall inform their customer of the receipt of cross-border inward transactions immediately on receipt of inward message. Messages received after close of operating hours of banks shall be informed to customer immediately at the start of the next business day. Banks shall undertake reconciliation and confirmat...
Post a Comment
Read more

Guidelines on Money Changing Activities (Updated as on April 02, 2026)

Reserve Bank of India (RBI) has updated the guidelines on money changing activities. Who is Authorised Person? Authorised Person means an authorised dealer, money changer, off-shore banking unit or any other person authorised under section 10(1) of Foreign Exchange Management Act, 1999 (FEMA) to deal in foreign exchange or foreign securities. What are the categories of Authorised Persons? Authorised Dealer (AD) Category-I – entities which are authorised by RBI to carry out all permissible current and capital account transactions. Authorised Dealer (AD) Category-II – entities which are authorised by RBI to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers (FFMC) and any other activity as decided by RBI, and include (i) Upgraded FFMCs; (ii) Select Regional Rural Banks (RRBs); (iii) Select Urban Cooperative Banks (UCBs); and (iv) Other entities. Authorised Dealer (AD) Category-III – entities which are authorised...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS) (Updated as on December 24, 2025)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more

FEMA - Borrowing and Lending [including External Commercial Borrowing (ECB) and Trade Credit (TC)]

Reserve Bank of India (RBI) has amended the regulations for borrowing and lending under the Foreign Exchange Management Act, 1999 (FEMA). What are the regulations for External Commercial Borrowing (ECB)? External Commercial Borrowing (ECB) means borrowing by an eligible borrower from a recognised lender. Eligible borrowers – Any person resident in India (other than an individual) that is incorporated, established or registered under a Central or State Act is an eligible borrower, provided such person is permitted for ECB in terms of applicable Acts. An eligible borrower that is under a restructuring scheme or corporate insolvency resolution process may raise ECB only if specifically permitted under the restructuring or resolution plan. An eligible borrower against whom any investigation, adjudication or appeal by a law enforcement agency for contravention of any rule, regulation or direction issued under FEMA is pending, may raise ECB notwithstanding the pending investigation or adjudi...
Post a Comment
Read more