RBI's 2023 Findings on Asset Classification Issues in Urban Cooperative Banks

Introduction

The Reserve Bank of India (RBI) identified various asset classification discrepancies during its supervisory cycle of 2023-24 for Urban Cooperative Banks (UCBs) based on findings from the fiscal year 2022-23. This blog outlines the key issues highlighted by the RBI regarding improper practices in asset classification, particularly focusing on the ramifications of these practices on financial metrics and compliance with regulatory norms.

Key Issues in Asset Classification

1. Improper Debiting of Minimal Balance Charges

Lack of Customer Consent: Certain UCBs deducted minimal balance charges from customers' accounts without prior notification. This contravenes para 5.6.(i) of the RBI circular on “Maintenance of Deposit accounts” dated July 01, 2015, resulting in inflated net profit, Net Worth, and Capital to Risk-Weighted Assets Ratio (CRAR).
Charges on Inoperative Accounts: In other instances, minimal balance charges were levied on inoperative accounts, violating para 5.5(xv) of the same RBI circular, further distorting financial metrics.

2. Approval of Fresh Loans to Address Existing Overdues

Some UCBs regularized borrower accounts multiple times over different financial years by repaying overdue amounts through new loans. This practice indicates underlying weaknesses, as it does not reflect true financial stability based on the firm's income assessments.

3. Non-Adherence to Provisioning for Security Receipts (SRs)

UCBs failed to maintain ongoing provisioning for Security Receipts in line with the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 dated September 24, 2021, which is critical for accurate asset management.

4. Upgrading NPAs to Standard Assets Without Clearing Overdues

Several UCBs upgraded NPA accounts to standard assets merely by reducing overdues to less than 90 days, which deviates from guidelines requiring that all overdues must be cleared for such upgrades.

5. Failure to Downgrade Accounts to NPA

Lack of Compliance in Restructured Accounts: UCBs did not downgrade accounts that had not demonstrated satisfactory performance post-restructuring, violating para 2.2.7.5 of the Master Circular on Prudential norms dated April 01, 2022.
Cash Credit Accounts: Some cash credit accounts were not downgraded despite evidence of being out of order for over 90 days.

6. Irregular Asset Classification Based on NPA Ageing

Certain UCBs improperly classified accounts without adequately considering the ageing of NPAs or instead based on facility-wise rather than borrower-wise assessments.

7. Overdue Classifications and Credit Issues

Term Loans as NPAs: Term loans were classified as NPAs when EMIs were overdue for over 90 days.
Non-Renewal of Credit Limits: Non-renewal of cash credit limits beyond 90 days from the due date was frequently noted.
Single Credits: Instances where an account showed a solitary credit close to the balance sheet date negatively impacted accurate asset classification.

8. Classification of Assets Beyond Established Guidelines

Assets that had been classified as Doubtful-II for more than two years should have been marked as Sub-standard, while those classified as Doubtful-III for exceeding three years should have been categorized as Doubtful-I.
Restructured Doubtful-II NPA accounts were incorrectly classified as Sub-standard rather than Doubtful-III, which is against regulatory norms.

9. Additional Oversights

Overdraft accounts that exceeded their sanctioned limits for over 90 days were not appropriately classified, and some UCBs failed to regularly debit interest, leading to inaccuracies in overdue calculations. Moreover, repayment terms stipulated in sanctions were not enforced consistently.

Conclusion

The RBI’s findings on the divergences observed in asset classification among UCBs underscore the need for stricter compliance with regulatory standards. UCBs are encouraged to enhance their operational practices to ensure accurate representation of financial health and maintain the integrity of their asset classification processes. Compliance with the mentioned laws and guidelines is essential not just for regulatory adherences but also for the sustainable growth of the financial sector.