RBI asks banks to stop charging interest on bad debt

On an account turning NPA, banks should reverse the interest already charged and not collected by debiting profit and loss account, and stop further application of interest, the Reserve Bank of India (RBI) said in a notification issued to scheduled commercial banks.

The Reserve Bank of India has revised prudential norms for asset classification and provisioning pertaining to banks' advances for computation of NPA levels.

RBI said the decision has been taken in consultation with the Indian Banks' Association (IBA).

However, banks may continue to record such accrued interest in a memorandum account in their books, as is the practice currently followed by some banks, RBI said.

For the purpose of computing gross advances, interest recorded in the memorandum account should not be taken into account, it said.

Banks are, therefore, advised to compute their gross advances, net advances, gross NPAs and net NPAs, in a format prescribed by the RBI with immediate effect.