In conformity with the prudential norms, Reserve Bank of India [RBI] had from time to time directed the banks to keep provisions with respect to the non-performing assets on the basis of classification of assets into prescribed categories. Further, taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realization of the security and the erosion over time in the value of the security charged to the bank, the bank should make the provisions against substandard assets, doubtful assets and loss assets.
The RBI, in its Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2014, provided guidelines with respect to provisioning of such loan accounts where there is erosion in the value of security/the banks have knowledge that the fraud is been committed by borrowers.
In case of such serious credit impairment, it will not be prudent that such accounts should go through various stages of asset classification and straightaway be classified as doubtful or loss asset as appropriate, depending upon the realizable value of the security.
On April 1, 2015, the RBI, on review, issued a guideline through its circular on provisioning pertaining to Fraud Accounts. A uniform provisioning norm in respect of all cases of fraud has been prescribed as under:
a) The entire amount due to the bank (irrespective of the quantum of security held against such assets), or for which the bank is liable (including in case of deposit accounts), is to be provided for over a period not exceeding four quarters commencing with the quarter in which the fraud has been detected;
b) However, where there has been a delay, beyond the prescribed period, in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once.
This guideline has not only circumferences the cases of fraud of the amount due to bank, but also the amount for which the bank is liable. In addition the RBI may also initiate the supervisory action where there has been delay by the bank in reporting a fraud, or provisioning there against and to adhere to the guidelines on 'Frauds- Classification and Reporting' in circular dated July 1, 2014.
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