Banks asked to keep 50-100% provision against embezzled money

The central bank has asked the commercial banks to keep 50-100% provision against the money stolen or embezzled from them.

The central bank gave the directive on Tuesday in a circular on the classification and provisioning system for the "other assets" in a bank's financial statement.

According to the circular, the banks have to keep 50% provision against uncoordinated revenue expenditures, legal expenses, fraudulent cases, inter-branch uncoordinated accounts classified as doubtful assets, and 100% provision if they are classified as bad assets.

Currently, different banks follow different procedures for classifying the other assets, so their financial statements appear different. That is why the central bank has issued a circular in this regard, said a senior official of the central bank.

"Other assets," includes all balance sheet asset accounts not covered specifically in other areas of the supervisory activity. Often, such accounts may be quite insignificant in the overall financial condition of the bank. However, significant sub-quality assets may be uncovered in banks lacking proper internal control and procedures.

According to the circular, in case of forgery, robbery, and embezzlement of funds, 100% provision should be kept by classifying them as "bad assets" till the money is recovered. In case of partial recovery, 100% provision has to be kept against the unpaid portion.

If there are uncertainties regarding the unresolved cases, they should be classified as "doubtful assets". If the cases are not resolved within a year, the banks have to classify them as "bad assets". 

In addition, the cost of computers, ATM machines, software, hardware must be adjusted to the appropriate sector within one year from the date of purchase. If a bank cannot adjust these costs within a year, they have to categorise them as bad assets. If there is any legal or other complication of any cost adjustment, it should be mentioned in the financial statement.

In case of inconsistency in inter-branch accounts, any debit entry older than a year but less than two years will be classified as doubtful asset and if it is older than two years or more it will be considered a bad asset.

Nostro accounts (any foreign currency account of a bank) will be classified as doubtful asset for a period of less than six months to one year and bad asset if it is older than one year.

If the interest due against the loan, treasury bills, bonds, corporate bonds, subordinated bonds, mutual funds, commercial papers, debentures remain unadjusted for less than six months to one year, they will be classified as doubtful assets. If they remain unadjusted for more that time period, they would be considered bad assets.

Savings certificates, wage earners bonds, army pension funds, civil pension funds will be classified as doubtful assets if they are uncoordinated for one year to two years and as bad assets if they remain uncoordinated for two years or more.