Under the provisions of the respective State Co-operative Societies Acts or other prudential considerations, many co-operative banks have established a Bad and Doubtful Debt Reserve (BDDR). BDDR may be created either by recognizing an expense in the Profit and Loss (P&L) Account or through appropriations from net profits.
According to Accounting Standard (AS) 5, all expenses recognized in a period should be included in the determination of net profit or loss for that period. Therefore, failing to recognize the required provisions for Non-Performing Assets (NPAs) as an expense in the P&L Account is not in line with current Accounting Standards. Additionally, the treatment of BDDR for regulatory capital and the calculation of net NPAs varies across banks, often differing from regulatory norms.
To ensure uniformity in the treatment of BDDR for prudential purposes, revised instructions are being issued:
- Effective FY 2024-25:
- All provisions as per Income Recognition, Asset Classification, and Provisioning (IRACP) norms, whether accounted for under “BDDR” or any other account head, shall be charged as an expense to the P&L account in the period they are recognized. The eligibility of such provisions for regulatory capital purposes will continue to follow the current guidelines on capital adequacy.
- Post-provision Appropriations:
- After charging all applicable provisions as per IRACP norms and other regulations to the P&L Account, banks may make any necessary appropriations of net profits below the line to BDDR, as required by applicable statutes or otherwise.
- One-time Measure for Transition:
- Previously, banks might have created provisions required as per IRACP norms by appropriating from the net profit rather than recognizing them as an expense in the P&L account. The BDDR balances as of March 31, 2024, representing such provisions, shall be identified and quantified.
- As of March 31, 2025, an appropriation equivalent to BDDR2024 shall be made directly from the P&L Account or General Reserves to provisions for NPA (liability). These provisions shall be permitted to be netted off from GNPAs to determine NNPAs.
- Any balances in BDDR not required by applicable statute can be transferred to General Reserves or the balance in the P&L Account below the line.
- After these adjustments, BDDR balances can be considered Tier 1 capital. However, BDDR balances should not be reduced from Gross NPAs to determine Net NPAs.
Banks must comply with the provisions of the respective State Co-operative Societies Acts or the Multi-State Co-operative Societies Act, 2002, as applicable. This circular applies to all Primary (Urban) Co-operative Banks, State Co-operative Banks, and Central Co-operative Banks and is effective immediately.
