What changed
RBI now requires all provisions under IRACP norms to be recognized as expenses in the P&L account, regardless of whether they were previously booked under BDDR or similar heads. For a one-time transition, BDDR balances as on March 31, 2024, that were created via profit appropriation must be transferred to NPA provisions or general reserves by March 31, 2025. Post-transition, BDDR can count as Tier 1 capital but cannot be used to reduce gross NPAs to net NPAs.
What it means for you
Co-operative banks must align their provisioning with Accounting Standard AS 5, ensuring all NPA provisions hit the P&L as expenses, not as below-the-line appropriations. This will improve transparency in reported profits and NPA calculations. For lenders, the one-time adjustment may impact capital ratios temporarily, but BDDR will now be uniformly treated as Tier 1 capital, simplifying regulatory capital calculations.
What you must do
- Identify and quantify BDDR balances as on March 31, 2024, that represent IRACP provisions created via profit appropriation.
- By March 31, 2025, transfer such BDDR amounts to NPA provisions (liability) or general reserves via below-the-line entries.
- Ensure all IRACP provisions from FY 2024-25 onward are charged as expenses in the P&L account.
- Update internal accounting policies to reflect that BDDR cannot be netted from gross NPAs for net NPA calculation.
- Review capital adequacy reporting to include BDDR as Tier 1 capital only after the transition entries are completed.
Who it affects
Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks
What is the key change for BDDR treatment from FY 2024-25?
All provisions under IRACP norms must be recognized as expenses in the P&L account, not as appropriations from net profit. BDDR can only be created from net profits after all provisions are expensed.
How should banks handle existing BDDR balances as on March 31, 2024?
Banks must identify BDDR balances representing IRACP provisions created via profit appropriation. By March 31, 2025, these must be transferred to NPA provisions or general reserves below the line. After this, BDDR can be counted as Tier 1 capital but not netted from gross NPAs.
Does this circular affect all co-operative banks?
Yes, it applies to all Primary (Urban) Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks, effective immediately from August 2, 2024.