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

RBI vide circular dated August 02, 2024 has directed for Prudential Treatment of Bad and Doubtful Debt Reserve by Co-operative Banks. 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 defined in 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 per the applicable statutes or otherwise.

As a one-time measure, with a view to facilitate rectification and smoother transition to an AS compliant approach, the following regulatory treatment is prescribed:

1. Previously, banks may have created provisions required as per IRACP norms by appropriating from the net profit rather than recognizing the same as an expense in the P&L account. The balances in BDDR as on March 31, 2024, representing such 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 (hereafter referred to as ‘BDDR2024’) shall be identified and quantified.
2. As at March 31, 2025, to the extent of BDDR2024, 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). Such provisions shall be permitted to be netted off from GNPAs to arrive at NNPAs.
3. 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.
4. 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.