After the Reserve Bank of India (RBI) observed that the processes for identification of Non-Performing Assets (NPAs), income recognition, provisioning and generation of related returns in many banks are not fully automated and that Banks were still resorting to manual identification of NPA and also over-riding the system generated asset classification by manual intervention, the RBI has directed Banks to upgrade their systems and ensure automated Asset Classification (classification of advances/investments as NPA/NPI and their upgradation), Provisioning calculation and Income Recognition processes by June 30, 2021.
According to the circular by the RBI, 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.
Asset classification rules shall be configured in the System, in compliance with the regulatory stipulations.
The circular further read "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. The System shall handle both down-grade and upgrade of accounts through Straight Through Process (STP) without manual intervention."
The RBI is set to conduct supervisory assessment and would take enforcement action against any Bank in case of non-compliance.
The reason behind RBI insisting on automation is because of instances where banks used to have an understanding with corporate customers to keep their loans standard with minimum repayments on the due date. Many of the banks used to indulge in evergreening of loans – a practice whereby banks extend even more loans to debt-laden companies to help them repay previous loans and hopefully earn enough revenue along the way to get out of trouble.
The RBI also wants to ensure that banks do not mismanage their accounts when it comes to provisioning.