RBI circular dated 14th September, 2020 on the subject. RBI wants to eliminate any human interference in income recognition, asset classification, provisioning, upgrading, downgrading etc. Gist of RBI circular follows:
We invite a reference to our circular DBS.CO.PPD.No.1950/11.01.005/2011-12 dated August 04, 2011, in terms of which banks were advised, inter alia, to have appropriate IT system in place for identification of Non-Performing Assets (NPA) and generation of related data/returns, both for regulatory reporting and bank’s own MIS requirements. It is, however, 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 also over-riding the system generated asset classification by manual intervention in a routine manner.
2. 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.
2.1 All borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, shall be covered in the automated IT based system (System) for asset classification, upgradation, and provisioning processes. Banks’ investments shall also be covered under the System.
2.2 Asset classification rules shall be configured in the System, in compliance with the regulatory stipulations.
2.3 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 and any other regulatory stipulations issued from time to time on provisioning requirements.
2.4 In addition, income recognition/derecognition in case of impaired assets (NPAs/NPIs) shall be system driven and amount required to be reversed from the income account should be obtained from the System without any manual intervention.
2.5 The System shall handle both down-grade and upgrade of accounts through Straight Through Process (STP) without manual intervention.
2.6 The System based asset classification shall be an ongoing exercise for both down-gradation and up-gradation of accounts. 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.
2.7 Exceptions may be granted from System driven classification in certain circumstances, which are expected to be minimum and temporary. It may be emphasised that these exceptions are from automated classification and not from IRAC norms and shall be subject to the conditions as explained below.
2.8 Banks shall not resort to manual intervention / over-ride in the System based asset classification process. In any exceptional circumstance where manual intervention is required to override the System classification, it must have at least two level authorisation. Such delegation of powers for authorising the exceptions should be as per the Board approved policy of the bank (by CEO, in case of unavailability of Board) and preferably should be done from the centralised location and suitably documented. Further, any such intervention shall have appropriate audit trails and subjected to audit by concurrent and statutory auditors. Detail reports of such manual intervention shall be placed before the Audit Committee / Audit Head (banks having no Board) regularly.
2.9 Banks shall maintain logs for all exceptions i.e. manual interventions / over-rides including, but not limited to, the date and time stamp; purpose/reason; user-IDs, name and designation of those making such manual intervention and necessary account details. These logs shall also be stored for a minimum period of three years and not be tampered with during the storage period. These logs shall be system generated.
System Requirements and System Audit:
2.10 In case a separate application outside the CBS is used as the System for NPA/NPI identification and/or classification, the System must have access to the required data from the CBS and/or other relevant applications of the bank and the borrower/investment accounts shall be updated back into the CBS automatically, wherever applicable, through STP.
2.11 Banks shall keep the business logic and other parameters/ configurations of the System updated to ensure that the System based identification, classification, provisioning and income recognition are strictly in compliance with the regulatory guidelines on an ongoing basis. There should be periodic system audit, at least once in a year, by Internal / External Auditors who are well versed with the system audit both on system parameters as also from the perspective of compliance to Income Recognition, Asset Classification and Provisioning guidelines.
2.12 Banks may draw up their standard operating procedure (SOP) for System based NPA classification for usage by the operating staff.
2.13 Baseline requirements for the NPA classification have been provided in the Annex. Banks are required to adhere to these instructions while designing and maintaining the System.
3. The adherence to these instructions will be examined as part of supervisory assessment of the banks and in case of non-compliance, suitable supervisory / enforcement action shall be initiated against the concerned bank.