What changed
RBI observed that many banks still rely on manual NPA identification and routinely override system-generated asset classifications. The new circular mandates that asset classification, provisioning calculation, and income recognition/derecognition must be system-driven with straight-through processing for both downgrades and upgrades. Manual intervention is now strictly limited to exceptional, temporary cases requiring two-level authorization, board-approved policy, audit trails, and regular reporting to the audit committee.
What it means for you
Banks must upgrade their IT systems to automate IRAC norms compliance for all accounts and investments, eliminating routine manual overrides. This will reduce regulatory risk and improve data integrity but requires significant investment in system configuration and process redesign. The strict exception handling framework increases operational discipline and audit scrutiny, potentially impacting turnaround times for classification changes.
What you must do
- Audit current IT systems to identify gaps in automated asset classification, provisioning, and income recognition for all borrowal accounts and investments.
- Configure system rules to comply with IRAC norms for both downgrade and upgrade of accounts, ensuring day-end classification updates and real-time status reporting.
- Establish a board-approved policy for manual overrides, limiting them to exceptional cases with two-level authorization, centralized execution, and detailed audit logs stored for at least three years.
- Implement straight-through processing for asset classification changes and ensure income reversal for NPAs/NPIs is system-driven without manual intervention.
- Prepare to meet the June 30, 2021 deadline by coordinating with IT vendors and testing system changes thoroughly.
Who it affects
All scheduled commercial banks (excluding RRBs), All small finance banks, IT and operations teams responsible for loan management systems, Risk and compliance departments, Internal and statutory auditors
What accounts must be covered under the automated system?
All borrowal accounts, including temporary overdrafts, regardless of size, sector, or limit type, as well as all bank investments, must be included in the automated system for asset classification, upgradation, and provisioning.
Can banks ever manually override the system's asset classification?
Yes, but only in exceptional and temporary circumstances, with at least two-level authorization, a board-approved policy, and detailed audit trails. Such overrides must be reported regularly to the audit committee and are subject to concurrent and statutory audit.
What is the deadline for compliance?
Banks must put in place or upgrade their systems to conform to these guidelines by June 30, 2021.