Inconsistencies in BDDR Treatment; Revised Instructions Issued

The Reserve Bank of India (RBI) has released, on August 2, 2024, revised guidelines concerning the prudential Treatment of Bad and Doubtful Debt Reserves (BDDR) for co-operative bank. It is applicable to all Primary (Urban) Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks, with immediate effect.

Previously, many co-operative banks established BDDR by either appropriating net profits or recognizing it as an expense in the Profit and Loss (P&L) Account, leading to inconsistencies with existing accounting standards. This further led to non-recognition of the required provisions for Non-Performing Assets (NPAs) as an expense while arriving at the net profit in the P&L Account

The revised guidelines seek to harmonize the accounting and regulatory treatment of BDDR for all co-operative banks, ensuring adherence to Accounting Standard (AS) 5 and regulatory norms.

Key Points:

• Direct Expense Recognition: All provisions as per Income Recognition, Asset Classification and Provisioning (IRACP) norms shall be charged as an expense to the P&L account. Eligibility shall be as per the existing guidelines on capital adequacy.
• BDDR Balance Adjustment: After charging applicable provisions, banks may make any appropriations of net profits below the line to BDDR.
• One Time Measure: The balances in BDDR as on March 31, 2024, i.e. as per the IRACP norms, shall be identified and quantified. On March 31, 2025, an appropriation shall be made directly (i.e. ‘below the line’) from the P&L Account or General Reserves to provisions for NPA (i.e. liability). Balances not required as per applicable statute may be transferred to General Reserves/Balance in P&L Account below the line. Post these steps, BDDR may be reckoned as Tier 1 capital, however, balances shall not be reduced from Gross NPAs to arrive at Net NPAs.