The RBI had, by its circular dated August 4, 2011, advised banks, inter alia, to have appropriate information technology (‘IT’) systems in place for identification of non-performing assets (‘NPA’) and generation of related data/returns, both for regulatory reporting and the bank’s own management information system requirements. Observing that several banks were still resorting to manual identification of NPAs and also over-riding the system generated asset classification by manual intervention in a routine manner, the RBI, in order to ensure completeness and integrity of automated asset classification, provisioning calculation and income recognition processes, by way of its circular dated September 14, 2020 (‘Automation Circular’) advised banks to put in place / upgrade their systems to conform to, the guidelines contained therein latest by June 30, 2021.

The automated IT based system (‘IT System’) for asset classification, upgradation, and provisioning processes is required to inter alia cover all borrowal accounts, including temporary overdrafts, irrespective of size, sector or types of limits, including the bank’s investments, and asset classification rules and provisioning requirements should be configured in the IT System in compliance with the regulatory stipulations. The IT System based asset classification should be an ongoing exercise for both down-gradation and up-gradation of accounts. Banks should ensure that the asset classification status is updated as part of day end process. The Automation Circular further states that exceptions may be granted from IT System driven classification in certain minimum and temporary circumstances, and the exceptions should be from automated classification and not from the Income Recognition and Asset Classification norms and should be subject to the conditions as explained in the Automation Circular.

If a separate application outside core banking system (‘CBS’) is used as the IT System for NPA/NPI identification and/or classification, the IT System must have access to the required data from the CBS and/or other relevant applications of the bank and the borrower/investment accounts should be updated back into the CBS automatically, wherever applicable, through straight through process (‘STP’). Banks are required to ensure that there should be periodic system audit, at least once in a year, by internal / external auditors who are well versed with the system audit both on system parameters as also from the perspective of compliance to RBI guidelines on ‘Income Recognition, Asset Classification and Provisioning’.