RBI Penalties Report – 30th October 2025

• Penalty Amount: ₹25,00,000 (Rupees Twenty-Five Lakh)
• Offence Date Reference: Financial position as on March 31, 2024
• Core Violation: Non-classification of credit facilities of certain borrowers as Non-Performing Assets (NPAs).
• Relevant Regulation: RBI directions on ‘Income Recognition, Asset Classification, Provisioning and Other Related Matters – UCBs’.

The failure to classify certain overdue accounts as NPAs suggests a breakdown in internal controls and automated systems. Possible root causes include:

• Systemic Failure: Inaccurate or missing automation logic within the Core Banking System (CBS) to track the 90-day overdue status.
• Manual Intervention/Human Error: Deliberate or accidental manual override of system classification, possibly due to pressure to present better asset quality figures.
• Training Gaps: Lack of clear understanding or frequent refresher training on the strict adherence to Income Recognition and Asset Classification (IRAC) norms.

• Automated Compliance Check: Implement mandatory, non-overrideable NPA classification rules that are run daily and audited weekly.
• Four-Eye Principle: Require dual verification and approval for any manual reversal or override of a system-generated NPA classification.
• Independent Assurance: Quarterly audits by an independent internal team, specifically focusing on the top 100 borrower accounts for accurate IRAC classification.

The primary lesson is that “strict, non-negotiable adherence to IRAC norms” is essential. Misclassification of NPAs severely distorts the bank’s true financial health, provisioning requirements, and regulatory reporting, which is a key mandate for protecting depositor interests.

• Penalty Amount: ₹1,00,000 (Rupees One Lakh)
• Offence Date Reference: Financial position as on March 31, 2024
• Core Violation: Regularized certain NPAs “without repayment through genuine sources”. (This practice is commonly known as ‘evergreening’).
• Relevant Regulation: RBI directions on ‘Income Recognition, Asset Classification, Provisioning and Other Related Matters – UCBs’.

Regularizing NPAs without genuine repayment indicates a deliberate attempt to evergreen the accounts, masking asset quality deterioration. Possible root causes include:

• Evergreening Pressure: Management pressure to reduce reported NPA levels or avoid high provisioning requirements.
• Lack of Source Verification: Absence of a clear policy or procedure to verify the source of large payments used to regularize an NPA.
• Credit Culture Deficit: A poor credit culture where the focus is on short-term compliance appearance rather than long-term asset recovery.

• Mandatory Source of Funds Documentation: Require borrowers to submit verifiable proof of the source of funds (e.g., bank statement, sale deed) for any large payment regularizing an NPA.
• System Flagging: Implement a system flag for large, lump-sum payments into NPA accounts, especially if the source account is related to the bank or a sister entity.
• Post-Regularization Review: Institute a mandatory, specialized post-regularization audit within 3 months to ensure the account continues to service debt normally.

True asset recovery requires genuine, sustainable repayment. “Evergreening of loans” is a serious regulatory breach that fundamentally undermines risk management and must be strictly prevented through robust verification processes for all loan regularization activities.