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RBI issues notification on Asset Classification and Income Recognition following COVID-19 regulatory

Following the Supreme Court decision judgement in the matter of Small Scale Industrial Manufacturers Association vs UOI & Ors. and other connected matters on March 23, 2021, the RBI has instructed banks regarding Asset Classification and Income Recognition following the expiry of the COVID-19 regulatory package. The Court held that no compound or penal interest must be charged for the six month moratorium announced during the pandemic and that the amount already recovered is to be refunded or adjusted in the next installment of the loan account. All lending institutions have been asked to put in place Board-approved policies to refund/adjust the ‘interest on interest’ charged to borrowers during the moratorium period, i.e. March 1, 2020 to August 31, 2020.


Lending institutions will have to follow the methodology for calculation of the amount to be refunded or adjusted for different facilities, as will be finalised by the Indian Banks Association (IBA) in consultation with other industry participants/bodies. The relief will be applicable to all borrowers, irrespective of whether moratorium had been fully or partially availed, or not availed. Lending institutions will have to disclose the aggregate amount to be refunded or adjusted in respect of their borrowers in their financial statements for the year ending March 31, 2021. With respect to accounts which were not granted any moratorium in terms of the COVID19 Regulatory Package, asset classification must be done as per the criteria laid out in the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015 or as per IRAC Norms.


With respect to accounts which were granted moratorium in terms of the COVID-19 Regulatory Package, the asset classification for the period from March 1, 2020 to August 31, 2020 will be governed by applicable circulars dated April 17, 2020 and May 23, 2020. For the period commencing September 1, 2020, asset classification for all such accounts shall be as per the applicable IRAC Norms.

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