RBI issues revised instructions on treatment of Bad and Doubtful Debt Reserve for co-op banks

The Reserve Bank of India (RBI) on Friday issued revised instructions on Bad and Doubtful Debt Reserve (BDDR) for co-operative banks to ensure uniformity in the treatment of this reserve for prudential purposes.

The revised instructions come as the current procedure of not recognising the required provisions for non performing assets (NPAs) as an expense while arriving at the net profit in the P&L account is not in consonance with extant Accounting Standards (AS).

Further, the treatment of BDDR for regulatory capital and reckoning of net NPAs varies across banks and in many cases has been observed to be at variance with regulatory norms.

So, as a one-time measure, with a view to facilitate rectification and smoother transition to an AS-compliant approach, the RBI has prescribed certain steps to be taken by these banks.

Prescribed steps

RBI noted that previously, banks may have created provisions required as per IRACP (Income Recognition, Asset Classification and Provisioning) norms by appropriating from the net profit rather than recognising the same as an expense in the P&L account.

Hence, 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 (‘BDDR2024’) need to be identified and quantified as a first step.

Further, as at March 31, 2025, to the extent of BDDR2024, an appropriation should be made directly (‘below the line’) from the P&L account or general reserves to provision for NPA (that is liability). Such provisions will be permitted to be netted off from gross NPAs to arrive at net NPAs.

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.

After passing the aforementioned entries, the balances in the BDDR can be reckoned as tier-1 capital. However, balance in the BDDR cannot be reduced from gross NPAs to arrive at net NPAs.

RBI noted that under the provisions of the respective State Co-operative Societies Acts, or otherwise, on prudential consideration, several co-operative banks have created BDDR.

While in some cases, BDDR is created by recognising an expense in the Profit and Loss (P&L) account, in other cases it is created through appropriations from net profits.