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

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

The central bank gave the directive Tuesday in a circular on the system for classifying and provisioning “other assets” in a bank’s financial statements.

According to the circular, banks must keep a 50% provision against expenditure of uncoordinated revenue, legal fees, fraudulent cases, uncoordinated inter-agency accounts classified as doubtful assets, and a 100% provision if they are classified as doubtful assets.

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

“Other assets” includes all balance sheet asset accounts not specifically covered in other areas of supervisory activity. Often these accounts can be quite insignificant in the overall financial picture of the bank. However, large substandard assets can be discovered in banks that lack proper internal procedures and controls.

According to the circular, in case of forgery, theft and embezzlement, a 100% provision must be kept by classifying them as “bad assets” until the money is recovered. In the event of partial recovery, a provision of 100% must be constituted on the unpaid part.

If there are uncertainties on the unresolved files, they must be classified as “doubtful assets”. If the cases are not resolved within a year, banks must classify them as “uncollectible assets”.

In addition, the cost of computers, ATMs, software and 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, it must classify them as bad assets. If there is a legal or other complication of a cost adjustment, this should be disclosed in the financial statement.

In the event of an inconsistency in the inter-agency accounts, any debit entry older than one year but less than two years will be classified as a doubtful asset and if it is older than two years or more it will be considered an irrecoverable asset.

Nostro accounts (any foreign currency account of a bank) will be classified as bad assets for a period of less than six months to a year and as bad assets if they are more than a year old.

If the interest due on the loan, treasury bills, bonds, corporate bonds, subordinated bonds, mutual funds, commercial paper, debentures remains unadjusted for less than six months at a year, they will be classified as doubtful assets. If they remain unadjusted for more than this period, they would be considered bad assets.

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