Reserve Bank of India (RBI) has begun the practice of meeting the statutory auditors of banks at the start of every quarter to stop banks from under-reporting non-performing assets (NPAs). In the meeting held with the auditors, RBI has been apprising them about its audit methods and NPA classification norms.
“RBI is conducting these interactions with the statutory auditors at the beginning of every quarter so that the divergences are kept under check, and the auditors are aware of their responsibilities,” said a banker. Every year RBI conducts a risk-based assessment of every bank to check that the banks are recognising the risks on their loans.
RBI has now made it mandatory that when one bank declares an account as an NPA, all other banks need to classify it as an NPA, so the sources of funds are blocked to the errant borrowers. This year for all three banks which reported divergences – Central Bank of India, Union Bank of India and Bank of India – the issue was with the classification date of the NPAs. All the three banks classified their NPAs at a later date than other banks classifying it as an NPA.
In April 2019, RBI also relaxed the rules for disclosure of the provisioning norms. Banks now have to disclose additional provisioning if it exceeds 10% of operating profit, instead of the earlier rule of 15% of net profit. And if the under-reporting of NPAs are more than 15% of the incremental NPAs then have to disclose it.
RBI is very cautious about divergences both in the provisions and the NPAs reported. In many cases, the central bank also downgrades accounts if they think that the account is weak or if the borrower is ever-greening the account.
“RBI wants zero divergence and wants all banks to follow the guidelines on the NPA to the dot, but in the latest round of divergences it is more to do with the date of classification of accounts rather than actual downgrades,” said a banker.
Provisions is the money banks have to set aside as capital buffers against bad loans. If the interest or the principal is not repaid in 90 days it is classified as an NPA, with banks required to set aside 15% of the loan amount as a provision, and if the loans is unsecured they have to set aside 20% of the loan amount.
“None of our loans were downgraded by the regulator. It was only about the classification date of the NPA,” said a senior official in Bank of India.
Earlier, banks did not have to report the divergences but from 2015, RBI made it mandatory to report the divergences. Union Bank of India has a divergence in the provision of Rs 2,280 crore and Rs 867 crore of gross NPA divergence. Central Bank of India had an NPA divergence of Rs 636.20 crore in gross NPA, about Rs 452.80 crore in net NPA and Rs 1,142 crore with respect to divergence in provisioning.