RBI asks full automation of Income Recognition, Asset Classification and Provisioning processes in banks

Reserve Bank of India today asked all the banks that they should ensure that the asset classification status is updated as part of day end process. Banks should also be able to generate classification status report at any given point of time with actual date of classification of assets as NPAs/NPIs. In any exceptional circumstance where manual intervention is required to override the System classification, it must have at least two level authorization, it said.

“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” the statement said.

The Central Bank noted in its circular that the processes for NPA identification, income recognition, provisioning, and generation of related returns in many banks are not yet fully automated and they are still found to be resorting to manual identification of NPA and also overriding the system generated asset classification by manual intervention in a routine manner. Therefore Asset classification rules shall be configured in the System, in compliance with the regulatory stipulations, it said. Calculation of provisioning requirement shall also be System based as per pre-set rules for various categories of assets, the value of the security as captured in the System, and any other regulatory stipulations issued from time to time on provisioning requirements, it said. In addition, income recognition/derecognition in case of impaired assets (NPAs/NPIs) shall be system driven and the amount required to be reversed from the income account should be obtained from the System without any manual intervention.

 “In order to ensure the completeness and integrity of the automated Asset Classification (classification of advances, investments as NPA and their upgradation), Provisioning calculation and Income Recognition processes shall be system driven and the system will also handle upgrades and downgrade of accounts through Straight Through Process (STP) without manual intervention. Banks are advised to put in place or upgrade their systems to conform to the guidelines latest by June 30, 2021”.

As per regulator’s notification dated September 14, 2020, Banks are required to adhere to Baseline Requirements for the NPA classification Solution as per RBI guidelines while designing and maintaining the System. The adherence to these instructions will be examined as part of supervisory assessment of the banks and in case of non-compliance, suitable supervisory / enforcement action shall be initiated against the concerned bank.

According to the Baseline requirement of RBI, Data Input in the system by any means should be fully captured and stored without truncation [For example, timestamp – with date and time, narration field, or any other text data captured] with necessary validation and verification check. Such validations with master data (or parameters used in asset classification fed into the system as per the internal policy of the bank) could prevent issues related to incorrect entries generally seen in margin setting, moratorium period, security valuation, repayment schedule, products mapped/linked to different categories of account holders (as per applicability), etc.,it further said.  According to the guidelines, any changes to the data, parameters from the backend shall be avoided. The solution should provide for changes to the data items only through the front end (from the application (Ex: CBS) itself and not through the backend database update) after requisite authorisation. Audit trails/logs of access, changes to any data, parameters, if any, should be captured with specific user details in the system.

Audit Log:

The solution should make provisions of audit trails/logs to capture details of mandatory fields (that are essential to complete the transaction and essential to identify the transaction for audit/forensic purpose in the future) of all the transactions (financial and non-financial), according to baseline requirement specified by the regulator. Logs should be maintained for changing the master data and also system generated activity logs of the users with administrative privileges should also be maintained, it said. Banks are also asked to secure storage and retention of logs in encrypted format with access controls in an archival solution under the above guidelines.

“All parameters required for NPA/NPI identification shall be captured in the CBS or associated sub-system(s)/module(s) meant for NPA/NPI identification/classification of asset codes as per Income Recognition and Asset Classification (IRAC) norms and extant instructions. It should provide for separate MIS report capturing all parameters for NPA/NPI identification. Such parameters could either be configured in database or application itself as per the architecture of the solution/sub-system” the guidelines said.