IRAC Norms Explained: Income Recognition, Asset Classification and Provisioning for Credit Teams

IRAC norms are RBI's prudential rules governing when a lender may book interest income, when an advance stops being standard, and how much must be provided against it. An account becomes an NPA when principal or interest is overdue more than 90 days, is stamped at day-end on the relevant calendar date, and moves standard to sub-standard to doubtful to loss on a fixed clock.

Key facts

• YuSight has supported 10 Mn credit journeys, and the asset-classification field is the one most often stale in a credit file — because classification changes daily at day-end while the CAM is written once.
• The governing document is reissued every 1 April. The current version is the Master Circular – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2025-26/13, DOR.STR.REC.9/21.04.048/2025-26, dated 1 April 2025, consolidating instructions up to 31 March 2025 (RBI). It applies to all commercial banks excluding RRBs. If you are reading a circular numbered RBI/2023-24/06, you are two years behind.
• Classification is a day-end process, not a month-end one. RBI's clarification of 12 November 2021 states that "classification of borrower accounts as SMA as well as NPA shall be done as part of day-end process for the relevant date and the SMA or NPA classification date shall be the calendar date for which the day end process is run" (RBI/2021-2022/125).
• Upgradation now requires the whole arrear, across every facility. Per paragraph 4.2.5 of the Master Circular, an NPA may be upgraded to standard "only if entire arrears of interest and principal are paid by the borrower", and for multi-facility borrowers only "upon repayment of entire arrears of interest and principal pertaining to all the credit facilities."
• System-level asset quality is at a multi-decade best. RBI's Financial Stability Report of 30 June 2026 put the gross NPA ratio of scheduled commercial banks at 1.8% as at March 2026, with a baseline stress projection of 1.9% by March 2028 (RBI, Financial Stability Report). Low system GNPA makes an individual slippage more conspicuous, not less.

What exactly do IRAC norms cover?

Three separate obligations that are usually spoken of as one:

1. Income recognition — whether interest on an advance may be taken to the profit and loss account at all.
2. Asset classification — which of four buckets the advance sits in on any given date.
3. Provisioning — how much capital must be set aside against it.

They interlock in one direction. Classification drives both income recognition and provisioning; nothing drives classification except the record of recovery. RBI's phrasing is that classification "should be based on the record of recovery" and be objective — a borrower's promising order book does not delay a slippage.

When does an account become an NPA?

An asset is non-performing when it ceases to generate income for the bank. The Master Circular sets out the trigger by facility type:

"Out of order" carries its own definition, clarified on 12 November 2021: an account is out of order if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for 90 days; or the outstanding balance is within the limit but there have been no credits continuously for 90 days; or credits during that period are not enough to cover the interest debited (RBI/2021-2022/125).

That third limb is the one that catches cash credit accounts nobody was worried about. A CC account inside its drawing power, turning over, but where the credits do not cover interest debited for 90 continuous days, is out of order. Since drawing power is recomputed from every stock and book-debt statement, an account can drift out of order without the sanctioned limit changing at all — the mechanics are set out in the drawing power calculator with a worked cash credit example.

What are SMA-0, SMA-1 and SMA-2?

SMA — Special Mention Account — is the pre-NPA warning ladder. Two tables, because revolving facilities work differently.

Loans other than revolving facilities

Revolving facilities (cash credit / overdraft)

There is no SMA-0 for revolving facilities.

The day-end clock, using RBI's own illustration. For a loan with a due date of 31 March 2021: if not paid before the day-end process of 31 March 2021, the account is tagged overdue at that day-end. It becomes SMA-1 on completion of the day-end process of 30 April 2021, SMA-2 on 30 May 2021, and NPA on 29 June 2021 (RBI/2021-2022/125).

Two things follow that credit teams routinely get wrong. The classification date is the calendar date of the day-end run, not the date the report was printed or the date someone noticed. And the clock does not care about your month-end. An account that slips on 29 June does not become an NPA on 30 June.

For exposures of ₹5 crore and above, the SMA position is also reported to CRILC — monthly in the CRILC-Main return, and in a weekly default report (RBI/2018-19/203, Prudential Framework for Resolution of Stressed Assets, 7 June 2019). Every other lender in the system sees the tag. This is why SMA-2 shows up in the CIBIL commercial report of a borrower who has told you nothing is wrong.

How does an account move from standard to loss?

Four categories, and the movement between them is time-based, not judgement-based — with one exception.

Doubtful assets then age within the category: D1 up to one year in doubtful, D2 one to three years, D3 more than three years. That ageing is what drives the provisioning escalator.

Note the asymmetry that catches new analysts. Sub-standard to doubtful is automatic on the calendar. Doubtful to loss is not — an asset only becomes loss when someone identifies it as such. A file can sit in D3 at 100% provisioning indefinitely without ever being classified loss.

What provisioning applies at each stage?

Rates below are from the Master Circular (RBI/2025-26/13). Verify against the current-year reissue before you rely on them in a policy document.

Standard assets

Non-performing assets

The line that costs money is the unsecured one. The 100% on the unsecured portion of a doubtful asset bites from day one of doubtful, regardless of ageing. Whether an advance is treated as secured turns on the realisable value of security, not the sanctioned security cover or the valuation report on file. A stale valuation is a provisioning error waiting to happen.

Worked provisioning example

Illustrative figures for a single term loan. Numbers are shaped to be realistic; they are not drawn from any actual account.

The facility

• Term loan outstanding: ₹10,00,00,000
• Realisable value of security (current, panel-valued): ₹6,00,00,000
• Unsecured portion: ₹10,00,00,000 − ₹6,00,00,000 = ₹4,00,00,000
• Due date of the missed instalment: 30 June 2026
• Sector: medium enterprise, non-CRE

Classification timeline

Provision at each stage

The step nobody budgets for. The jump from sub-standard to D1 is ₹1,50,00,000 to ₹5,50,00,000 — an incremental ₹4,00,00,000 charge on a single anniversary date, driven entirely by the unsecured portion crystallising at 100%. It is fully predictable twelve months in advance. If your provisioning forecast does not carry that step, the surprise is a process failure, not a credit event.

What happens to the security value. Suppose the panel valuation is refreshed at D2 and realisable value has fallen from ₹6 crore to ₹4 crore. Unsecured portion becomes ₹6,00,00,000. Provision at D2 = (100% × 6,00,00,000) + (40% × 4,00,00,000) = 6,00,00,000 + 1,60,00,000 = ₹7,60,00,000, against ₹6,40,00,000 on the old valuation. A ₹2 crore fall in realisable value costs ₹1.2 crore of additional provision at the same classification.

How is income recognised on an NPA?

The rule is simple and absolute: a bank should not charge and take to income account interest on any NPA. Income on NPAs is recognised on realisation, not accrual.

Three consequences the CAM writer needs to carry:

1. Interest already booked in the current year but uncollected must be reversed when the account slips. If it was booked in a past year, it is provided for rather than reversed.
2. Fees, commission and similar income accrued on NPAs follow the same treatment.
3. Recoveries are applied by the bank's policy, consistently applied — most Indian lenders appropriate towards interest first, but the policy must be uniform and disclosed.

For a lender whose quarter is close, a slippage on 28 September and a slippage on 2 October are materially different P&L events. That is not a reason to move the date. It is a reason to run early-warning triggers at SMA-1, when there are still 60 days of runway.

How does an NPA get upgraded?

Paragraph 4.2.5 of the Master Circular is unambiguous. An NPA may be upgraded to standard only if the entire arrears of interest and principal are paid. For a borrower with more than one credit facility from the bank, upgradation happens only upon repayment of the entire arrears across all facilities.

This closed a real practice. Before the November 2021 clarification, part-payment of overdues was commonly treated as sufficient to upgrade — an account could be brought current on one facility while another stayed in arrears. Now the borrower must clear everything.

RBI subsequently allowed NBFCs additional time (until 30 September 2022) to put in place the mechanism for implementing the upgradation rule. Confirm the exact circular reference before citing it in a policy note; the substantive rule for banks applied from November 2021.

What happens on restructuring?

Restructuring is not a way to avoid the classification. Under the Prudential Framework for Resolution of Stressed Assets (RBI/2018-19/203, DBR.No.BP.BC.45/21.04.048/2018-19, 7 June 2019):

• On default, lenders undertake a prima facie review of the borrower account within 30 days — the Review Period.
• Where a resolution plan is pursued, all lenders enter an inter-creditor agreement (ICA) during the Review Period.
• The resolution plan must be implemented within 180 days from the end of the Review Period.
• Miss it and additional provisioning bites: 20% if not implemented within 180 days from the end of the Review Period, and a further 15% (total additional 35%) if not implemented within 365 days from the commencement of the Review Period.
• CRILC reporting applies to borrowers with aggregate exposure of ₹5 crore and above, monthly, plus a weekly default report.
• Independent credit evaluation is required for resolution plans involving restructuring or change in ownership where the aggregate exposure is ₹100 crore and above.

Restructuring of a standard account normally results in the account being downgraded to sub-standard, and an account already NPA continues in its existing classification. Upgradation after restructuring requires satisfactory performance during a specified period, where satisfactory performance means the borrower is not in default at any point during that period.

The precise definition of "specified period" (tied to repayment of a stated proportion of the outstanding principal debt under the resolution plan) and the credit-rating threshold for resolution plans should be quoted directly from the current framework text before use in a sanction note.

What breaks in practice

Six failure modes that show up in audit, in that order of frequency.

1. The CAM quotes a stale classification. The note says "Standard" because that was true when spreading finished. Classification moves at day-end, every day.
2. Drawing power is not recomputed, so a cash credit account that is technically out of order reads as within limit. See drawing power vs ratio covenants in cash credit facilities.
3. Due dates are not specified in the loan agreement, so the overdue clock has no defined start. RBI's November 2021 clarification requires the exact due dates, repayment frequency and the principal-interest breakup to be set out in the agreement.
4. Realisable value of security is taken from a valuation years old, understating the unsecured portion and therefore the provision.
5. Borrower-level versus facility-level classification is confused. Where any facility of a borrower is an NPA, all facilities of that borrower are generally classified NPA — a fact that gets lost when facilities sit in different systems.
6. Restructuring is treated as a cure rather than an event with its own provisioning consequences.

Every one of these is a data-freshness problem rather than a judgement problem, which is exactly why it belongs in an automated monitoring layer. YuSight's covenant monitoring runs financial and conduct tests against the current spread rather than the spread as at sanction, so a classification change or a drawing-power shortfall surfaces as a test result rather than as a discovery at the next annual review. The wider approach is set out in covenant monitoring in commercial lending, and where IRAC status sits inside the appraisal note is covered in the format Indian banks use for a credit appraisal memorandum and, section by section, in the credit appraisal note format used by Indian lenders.

FAQ

What are IRAC norms?

IRAC stands for Income Recognition and Asset Classification. They are RBI's prudential rules setting out when a lender may book interest income on an advance, which of four classification buckets the advance belongs in, and how much provision must be held against it. They are consolidated in a Master Circular that RBI reissues every 1 April.

How does asset classification move from standard to loss?

An account becomes an NPA after more than 90 days overdue and is classified sub-standard. After twelve months as an NPA it becomes doubtful, and it ages within doubtful at one year and three years. Loss is different — it is not automatic, it happens when the bank, its auditors or an RBI inspection identify the amount as uncollectible.

What provisioning applies at each stage?

Standard assets carry 0.25% to 2.00% depending on sector. Sub-standard is 15% of total outstanding, or 25% where the exposure is unsecured. Doubtful is 100% of the unsecured portion plus 25%, 40% or 100% of the secured portion by ageing. Loss assets are provided fully.

When exactly does the 90-day clock start?

From the due date specified in the loan agreement. If the amount is not paid before the day-end process of the due date, it is overdue from that day-end. Ninety days later, again at day-end, the account becomes an NPA — RBI's own illustration runs a 31 March due date to an NPA date of 29 June.

Is asset classification done monthly or daily?

Daily. Since the November 2021 clarification, SMA and NPA classification happens as part of the day-end process for each calendar date, and the classification date is the date of that day-end run. Month-end batch stamping is not compliant.

Can an account be upgraded after part payment?

No. The entire arrears of interest and principal must be paid, and for a borrower with several facilities, the arrears on all facilities. Part payment brings the days-overdue count down but does not upgrade the account.

Does a cash credit account become an NPA if it stays within the limit?

It can. An account is out of order if there are no credits continuously for 90 days, or if the credits during that period do not cover the interest debited — even where the balance never exceeds the sanctioned limit or drawing power.

If one facility is an NPA, are the others affected?

Generally yes. Classification is borrower-level: where any facility of a borrower becomes non-performing, all facilities of that borrower are classified as NPA. This is the rule most often broken when facilities live in different systems.

What happens to interest already booked when an account slips?

Interest booked in the current year on the account and not collected is reversed. Interest booked in earlier years is provided for instead. From the date of slippage, interest is recognised only on realisation.

Does restructuring stop the classification clock?

No. Restructuring a standard account normally downgrades it to sub-standard, and it can only return to standard after satisfactory performance over a specified period. Failing to implement a resolution plan inside the framework's timelines adds 20% and then a further 15% of provisioning.

Key takeaways

• Read the current-year Master Circular. It is reissued each 1 April; the version in force is RBI/2025-26/13 dated 1 April 2025, consolidating instructions to 31 March 2025.
• Classification is a day-end process on a calendar date. Anything in your credit file that says otherwise is out of date by construction.
• The expensive step is sub-standard to D1, where the unsecured portion crystallises at 100%. On the worked example it is a ₹4 crore charge, visible twelve months ahead.
• The unsecured portion is driven by realisable value of security. Refreshing a valuation changes the provision without changing the classification.
• Upgradation needs the entire arrears across all facilities. Part payment is not a cure.

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