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Updated BDDR Guidelines for Cooperative Banks by RBI

Updated Guidelines for Bad and Doubtful Debt Reserves by Cooperative Banks

The Reserve Bank of India (RBI) has released revised guidelines regarding the treatment of Bad and Doubtful Debt Reserves (BDDR) specifically for cooperative banks, effective August 2, 2024. These advisory aims to align BDDR accounting and regulatory practices with Accounting Standard (AS) 52, enhancing compliance and transparency.

Key Changes in BDDR Treatment

Under the new guidelines:

  • Direct Expense Recognition: Cooperative banks are required to recognize provisions for Non-Performing Assets (NPAs) directly as expenses in their Profit and Loss (P&L) accounts. Previously, various banks had appropriated net profits for BDDR without treating it as an expense.

  • Adjustment of BDDR Balances: Banks must adjust their BDDR balances as of March 31, 2024. This involves transferring amounts previously appropriated from net profits to provisions for NPAs or general reserves, ensuring adherence to Income Recognition, Asset Classification, and Provisioning (IRACP) regulations.

  • Capital Eligibility: BDDR can be considered part of Tier 1 capital; however, it will not impact the computation of Net NPAs from Gross NPAs.

These directives apply to all Primary (Urban) Cooperative Banks, State Cooperative Banks, and Central Cooperative Banks.

Circular Overview

As mandated by relevant State Cooperative Societies Acts, cooperative banks have created Bad and Doubtful Debt Reserves (BDDR). The BDDR is formed in two primary methods: acquiring it through recognized expense in the P&L account or via appropriating funds from net profits.

  1. Accounting Standard Compliance: According to Accounting Standard (AS) 52, all recognized expenses must be included in determining net profit or loss for the period. Failure to recognize required provisions for NPAs as an expense is inconsistent with current standards. There are discrepancies across banks regarding the regulatory treatment of BDDR, affecting compliance.

  2. Revised Instructions: To establish uniformity, the following enhanced instructions on BDDR will take effect from FY 2024-25:

    • Provisions as per IRACP norms shall be charged to the P&L account directly.
    • After accounting for all applicable provisions, banks may make appropriations to BDDR below the line as required under applicable laws.

  3. One-Time Regulatory Treatment:

    • Identify and quantify the BDDR balance as of March 31, 2024, constituted from prior net profit appropriations instead of recognized expenses.
    • By March 31, 2025, BDDR2024 amounts should be appropriated directly from the P&L account or General Reserves to provisions for NPA. This amount may be netted off from Gross NPAs to result in Net NPAs.
    • If BDDR is not legally required, it can be moved to General Reserves or the P&L Account below the line.
    • After these adjustments, BDDR balances can be considered as Tier 1 capital, but will not affect Gross to Net NPAs calculations.

  4. Legal Compliance: Banks must align with respective State Cooperative Societies Acts and the Multi-State Cooperative Societies Act, 2002.