Under the State Co-operative Societies Acts and for prudential reasons, many co-operative banks have established a Bad and Doubtful Debt Reserve (BDDR). Some create the BDDR as an expense in the Profit and Loss (P&L) Account, while others do so through appropriations from net profits.   

According to Accounting Standard (AS) 5, all expenses recognized in a period must be included in determining net profit or loss for that period. Therefore, not recognizing provisions for Non-Performing Assets (NPAs) as an expense when calculating net profit in the P&L Account does not comply with existing Accounting Standards. Additionally, the treatment of BDDR for regulatory capital and net NPAs varies across banks and often does not align with regulatory norms.  

Therefore to bring about uniformity in the treatment of BDDR for prudential purposes, revised instructions on BDDR have been issued via this Notification, as under:

1. With effect from the FY 2024-25,  all provisions as per Income Recognition, Asset Classification and Provisioning (IRACP) norms, whether accounted for  under the head “BDDR” or any other head of account, shall be charged as an expense to the P&L account in the accounting period in which they are recognised. The eligibility of such provisions for regulatory capital purposes shall continue to be as defined in the extant guidelines on capital adequacy.
2. After charging all applicable provisions as per IRACP norms and other extant regulations to the P&L Account, banks may make any appropriations of net profits below the line to BDDR, if required as per the applicable statutes or otherwise.
3. As a one-time measure, with a view to facilitate rectification and smoother transition to an AS compliant approach, the following regulatory treatment is prescribed:
   • In the past, banks may have created provisions required by IRACP norms by appropriating them from net profits instead of recognizing them as an expense in the P&L account. The balances in the BDDR as of March 31, 2024, which represent such provisions made according to IRACP norms by directly appropriating from net profits rather than recognizing them as an expense in the P&L Account in previous years (referred to as ‘BDDR2024’), should be identified and quantified.
   • As at March 31, 2025, to the extent of BDDR2024, an appropriation shall be made directly (i.e. ‘below the line’) from the P&L Account or General Reserves to provisions for NPA (i.e. liability). Such provisions shall be permitted to be netted off from GNPAs to arrive at NNPAs.
   • To the extent the balances in BDDR are not required as per applicable statute, the same can also be transferred to General Reserves/Balance in P&L Account below the line.
   • After passing the above entries, the balances in the BDDR can be reckoned as Tier 1 capital. However, balance in the BDDR shall not be reduced from Gross NPAs to arrive at Net NPAs.

Banks should comply with the provisions of the respective State Co-operative Societies Acts / Multi-State Co-operative Societies Act, 2002 as applicable.  

These  instructions are applicable with immediate effect, viz. August 2, 2024