RBI asks banks to use automated IT-based system for asset classification

Concerned over manual identification of bad loans by some banks, the RBI on Monday asked lenders to introduce automated IT-based system for asset classification and provisioning.

In a circular, the RBI said in August 2011 banks were advised to put in place appropriate IT systems for identification of non-performing assets (NPAs) and generation of related data and returns, both for regulatory reporting and bank's own management information system (MIS) requirements.

It is, however, observed that the processes for NPA identification, income recognition, provisioning and generation of related returns in many banks are not yet fully automated, the RBI said.

"Banks are still found to be resorting to manual identification of NPA and also over-riding the system generated asset classification by manual intervention in a routine manner," it added.

The RBI asked banks to put in place or upgrade their IT systems in order to ensure the completeness and integrity of the automated asset classification, provisioning calculation and income recognition processes latest by June 30, 2021.

All borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, should be covered in the automated IT-based system for asset classification, upgradation, and provisioning processes, it said.

"Banks' investments shall also be covered under the system," it said, adding that asset classification rules should be configured in the system, in compliance with the regulatory stipulations.

Further, calculation of provisioning requirement should also be system based as per pre-set rules for various categories of assets, value of security as captured in the system and any other regulatory stipulations issued from time to time on provisioning requirements.

"The System shall handle both down-grade and upgrade of accounts through Straight Through Process (STP) without manual intervention," RBI said.

Exceptions may be granted from system driven classification in certain circumstances, which are expected to be minimum and temporary, subject to certain conditions.

The RBI further said the adherence to the instructions will be examined as part of supervisory assessment of the banks.

In case of non-compliance, suitable supervisory or enforcement action would be initiated against the concerned bank, it added.