RBI Penalises Vikas Souharda Co-operative Bank ₹1 Lakh for NPA Classification Lapse

The Reserve Bank of India has imposed a monetary penalty of ₹1 lakh on Vikas Souharda Co-operative Bank Limited, Hosapete, Karnataka, for failing to classify certain loan accounts as non-performing assets (NPAs). RBI announced the action in Press Release No. 2026-2027/957 dated 24 August 2026. The penalty order itself is dated 20 August 2026.

What RBI found

According to the press release, the bank did not comply with certain RBI directions on "Income Recognition, Asset Classification, Provisioning and Other Related Matters - UCBs". After the enforcement process, RBI found that the following charge was sustained: the bank had failed to classify certain loan accounts as NPAs. The press release does not name the borrowers, the number of accounts or the amounts involved.

How the case moved from inspection to penalty

RBI carried out a statutory inspection of the bank with reference to its financial position as on 31 March 2025. Based on the supervisory findings and related correspondence, RBI issued a notice asking the bank to show cause why a penalty should not be imposed for not complying with the directions. RBI then considered the bank's written reply and the oral submissions made at a personal hearing before holding that the NPA-classification charge was sustained.

The rules the bank was expected to follow

RBI's Master Circular on Income Recognition, Asset Classification, Provisioning and Other Related Matters - UCBs (RBI/2023-24/26, 8 May 2023) sets out the NPA framework for primary (urban) co-operative banks under the same title that the press release cites. Its main tests are:

• Term loans: an account becomes an NPA when interest and/or an instalment of principal remains overdue for more than 90 days (para 2.1.1).
• Cash credit and overdraft: the account becomes an NPA when it remains "out of order".
• Agricultural advances: classification follows crop-season based norms given in Annex 1.
• Asset categories: an NPA is sub-standard for up to 12 months, then doubtful; a loss asset is one where loss has been identified but not written off (para 3.2).
• Income recognition: interest on NPAs must not be taken to income on an accrual basis; it is recognised only when actually received (para 4.1.1).
• Provisioning: a general provision of 10% on sub-standard assets and 20% to 100% on doubtful assets depending on the period and security (para 5.1.2).

When an account that should have been classified as an NPA is kept as standard, interest can continue to be booked as income, provisions stay lower than required and the reported gross and net NPA figures understate stress in the loan book. This explains why RBI treats a missed NPA classification as a compliance failure in itself.

What the penalty does not decide

RBI stated that the action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement between the bank and its customers. RBI also said the penalty is without prejudice to any other action it may initiate against the bank; the press release does not report any further action.

What auditors and bank finance teams should check

Statutory and concurrent auditors of co-operative banks can use this case as a prompt to test system-based NPA flagging against the 90-day overdue and "out of order" tests, review manual overrides that keep accounts as standard, check that interest on accounts crossing into NPA is reversed or not accrued, and confirm that provisions follow the resulting classification. Where a bank relies on the core banking system to tag NPAs, the parameters in that system should be reconciled with the applicable RBI directions.

Updated on 27 September 2026: added the press release number, a summary table and the NPA, income-recognition and provisioning rules from RBI's master circular for UCBs.