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

Current Context: The Reserve Bank of India (RBI) recently issued updated guidelines on the Prudential Treatment of Bad and Doubtful Debt Reserve (BDDR) for co-operative banks, effective from August 2, 2024.

• Here are the key points:
• Uniform Accounting Treatment: All provisions for Non-Performing Assets (NPAs) must be recognized as an expense in the Profit and Loss (P&L) account in the period they are recognized. This ensures compliance with Accounting Standard (AS) 5.
• Regulatory Capital: The eligibility of such provisions for regulatory capital purposes will continue as defined in the existing guidelines on capital adequacy.
• Appropriations: After charging all applicable provisions to the P&L account, banks may make appropriations of net profits to BDDR if required by applicable statutes.
• Transition Measures: As a one-time measure, banks can rectify past practices where provisions were created by appropriating from net profits rather than recognizing them as an expense. The balances in BDDR as of March 31, 2024, will be adjusted accordingly by March 31, 2025.
• These guidelines aim to bring uniformity and ensure that co-operative banks adhere to consistent accounting and regulatory practices.

Question:

1 According to the updated RBI guidelines, how must all provisions for Non-Performing Assets (NPAs) be recognized?

• A) As a liability in the Balance Sheet
• B) As an expense in the Profit and Loss (P&L) account
• C) As an income in the Profit and Loss (P&L) account
• D) As a capital expenditure

Answer: B) All provisions for Non-Performing Assets (NPAs) must be recognized as an expense in the Profit and Loss (P&L) account in the period they are recognized. This ensures compliance with Accounting Standard (AS) 5.