EC No. 39 / DoS – 11 / 2023

06 March 2023

Ref. No. NB. HO. DoS. Pol. / 5945 A / J-1 / 2022-23

All Managing Director
All State Cooperative Banks
The Managing Director/ Chief Executive Officer
All District Central Cooperative Banks

Madam /Dear Sir

Divergence in NPA classification observed by NABARD Inspection Team

NABARD assesses compliance by banks with extant prudential norms on income recognition, asset classification and provisioning (IRACP) as part of its supervisory process. There have been instances of material divergence in banks’ asset classification and provisioning from RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank.

2. In this connection, we invite a reference to Circulars No. 225/DoS.20/2017-18, Ref. NB.HO.POL / 2233 / J-1/ 2017-28 dated 31 August 2017 and No. 47/DoS-11/2019-20, Ref. No. NB. DoS/POL/ 3437/ J-1/ 2019-20 dated 27 February 2020 wherein StCBs/DCCBs were advised about making provisions against the divergence and share the divergence observed by the Inspecting Officers with statutory auditors of the bank concerned to enable them to verify that the classification of such accounts and similar other accounts in the same branch and in other branches of the bank and provisioning thereon is correctly done in the bank’s book as at the end of the financial year.

3. On a review, it has been observed that some banks are still not ensuring the classification of loans and advances strictly as per prudential norms prescribed by RBI; the divergence pointed out in the inspection reports are not fully-provided for and the loan accounts remain non-performing at the end of next financial year. Further, despite the divergence being pointed out in the IRs and despite the accounts continuing to remain non-performing at the end of next financial year, some Statutory Auditors are not ensuring proper classification of assets while finalising the books of accounts as at the end of next financial year. This has been viewed seriously by RBI during the course of Biennial Financial Inspection 2022.

4. Accordingly, we reiterate that StCBs/DCCBs may ensure proper classification of the accounts identified as divergence by NABARD and verify that the classification of similar other accounts elsewhere in the bank are done properly and create appropriate provision thereagainst.

5. Further, we advise that the recurrence of such divergence in NPA classification will be viewed seriously and regulatory action may be recommended to RBI against the recalcitrant banks.

6. Please acknowledge the receipt of this circular to our Regional Office in your State/ UT.

Yours faithfully

Sd/-

(K.S.Raghupathi)
Chief General Manager