What changed
RBI observed banks using different methods to compute and report advances and NPAs, leading to inconsistent interpretations. To ensure uniformity, RBI now mandates that on an account turning NPA, banks must reverse interest already charged but not collected by debiting P&L, and stop applying further interest. Accrued interest may be recorded in a memorandum account but excluded from gross advances.
What it means for you
Banks must align their NPA reporting to a single method, eliminating discretion in interest treatment. This improves transparency and comparability of asset quality across institutions. Lenders need to adjust systems to reverse interest on NPA classification and ensure memorandum interest is not counted in gross advances.
What you must do
- Update NPA recognition processes to reverse uncollected interest and stop further interest application on NPA accounts.
- Set up memorandum accounts for accrued interest on NPAs, ensuring it is excluded from gross advances.
- Adopt the prescribed format for reporting Gross Advances, Net Advances, Gross NPAs, and Net NPAs immediately.
- Train staff on the new uniform reporting method to ensure compliance and avoid auditor queries.
Who it affects
All Scheduled Commercial Banks (including Local Area Banks, excluding RRBs), Risk management and credit teams, Finance and reporting departments, Auditors and compliance officers
What happens to interest already charged but not collected when an account turns NPA?
Banks must reverse such interest by debiting the Profit and Loss account and stop applying further interest. Accrued interest can be recorded in a memorandum account but must not be included in gross advances.
Does this circular change the definition of Gross Advances?
Yes, for reporting purposes, Gross Advances exclude interest recorded in the memorandum account. The circular provides a standard format for computing advances and NPAs to ensure uniformity.