Co-operative Banks and BDDR
After a close reading of the RBI circular titled “Prudential Treatment of Bad and Doubtful Debt Reserve (BDDR) by Co-operative Banks” issued on August 2, 2024 (RBI/2024-25/58), few pertinent issues arise and that have caused lots of confusion amongst the cooperative banks. Here is a comprehensive analysis of the key provisions, interpretational contradictions, and the anomalies that are creating confusion among stakeholders.
Purpose of the Circular:
The RBI aims to standardize how BDDR (Bad and Doubtful Debt Reserve) is treated, especially:
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Its accounting treatment in the Profit & Loss (P&L) account,
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Its impact on Net NPAs and regulatory capital,
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And to align it with Accounting Standard 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies) and IRACP (Income Recognition, Asset Classification, Provisioning and Other Related Matters) norms.
What the Circular Prescribes (in essence):
1. Going Forward (FY 2024–25 Onwards):
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All NPA provisions (as per IRACP norms) must be charged as expense in the P&L—even if they’re recorded under “BDDR” or any other head.
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The eligibility of such provisions towards regulatory capital shall be governed by the existing guidelines on Capital Adequacy.
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After charging applicable provisions as per IRACP Norms, banks may appropriate profits below the line to BDDR if required by State laws or internal policy.
2. One-Time Transition Provision:
Banks who previously (till FY 2023–24) made required NPA provisions directly from appropriation of net profit (below the line) to BDDR (and not as an expense) must:
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Identify the BDDR2024 balance (provisions not routed through P&L).
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By March 31, 2025, pass rectification entries by:
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Transferring from General Reserves or P&L (below the line) to “Provisions for NPA” (liability).
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Then, these provisions can be deducted from Gross NPAs to arrive at Net NPAs.
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Remaining BDDR (not required for provisioning) may be transferred to General Reserve or P & L Account (below the line).
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After these adjustments, the balance in the BDDR can be reckoned as Tier 1 Capital but cannot be netted from Gross NPA to arrive at Net NPA.
Key Anomalies and Confusions Identified:
1. Contradictory Treatment of BDDR for Net NPA Computation
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Point 3(c)(ii) says: BDDR2024 once transferred to “Provisions for NPA” can be deducted from GNPAs to arrive at NNPAs.
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Point 3(c)(iii) says: Balance in BDDR not required as per applicable statute can also be transferred to General Reserve or P&L (below the line).
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But Point 3(c)(iv) says: BDDR balances shall not be reduced from Gross NPAs to calculate Net NPAs.
Conflict: There appears to be contradiction in all the 3 clauses which needs to be sorted out. The word “BDDR” being used at multiple places but in different context is creating confusion.
The fallout of the confusion is : which BDDR balance is deductible from GNPAs?
2. Ambiguity Between ‘Provision’ and ‘Reserve’
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The circular switches interchangeably between “reserves” and “provisions” [(Clause c(ii)], despite clear accounting differences:
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Provisions are expenses (which are done by debiting P&L above the line).
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Reserves are appropriations from profit (i.e. Distributable Profit).
Result: This creates confusion about what constitutes regulatory provision and what counts as Tier 1 capital, especially when provisions are “moved into” or “out of” BDDR.
3. Impact on Tier 1 Capital Not Consistently Defined
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It states: “After passing the above entries, balances in BDDR can be reckoned as Tier 1 capital.”
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But doesn’t clarify:
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Whether this applies only to residual balances not used for provisioning.
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Or to the entire BDDR balance post adjustments.
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(It further states : The balance in the BDDR shall not be reduced from Gross NPA to arrive at Net NPA.)
Concern: Banks might overstate Tier 1 Capital by including entire BDDR balances.
4. Ambiguity regarding Compliance
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The circular is dated 2nd August, 2024 and is applicable with immediate effect but also says that rectification to be carried out as at March 31, 2025, but:
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It does not clarify whether quarterly reporting of BDDR2024 is required during FY 2024–25.
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Leaves uncertainty for statutory auditors and managements.
5. If any Conflict with State Co-op Laws?
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Point 4 states banks must comply with the provisions of respective State Co-op Acts/MSCS Act, 2002.
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But what if State Acts mandate BDDR to be created by appropriation of profits?
Conflict: RBI’s directive to recognize all IRACP provisions through P&L may contradict such statutory mandates. No clarity is given on resolution of such legal conflicts.
6. Lack of Reporting Format or Disclosure Norms
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No guidance is provided on:
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How banks must disclose BDDR adjustments in financial statements,
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Whether separate schedules or notes are expected,
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Any audit confirmation requirements.
Suggestions for Clarity:
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RBI may consider issuing FAQs or a follow-up clarification, especially on:
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BDDR deduction from GNPAs
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Tier 1 capital inclusion
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State Act overrides
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Interim period disclosures
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Provide model journal entries and accounting illustrations.
3.
Standardize disclosure formats in balance sheets and notes