Q A Series 2025 - S No 43 - IRACP Norms – Part 1

 

The Banking Tutor

Question Answer Series 2025

S No 43                                                                  22-08-2025

IRACP Norms – Part 1 

(Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances) 

01. On what basis RBI has introduced Prudential Norms for Income Recognition and Asset Classification? 

In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. 

02. What is the Basis for Income Recognition and Asset Classification? 

The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. 

03. What is the Basis for Provisioning ? 

The provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof. 

04. What is a Non Performing Asset? 

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. 

05. What are the criteria to classify Account as NPA?

A non-performing asset (NPA) is a loan or an advance where; 

a) interest and/ or instalment of principal remains overdue for a period of more than 90  days in respect of a term loan, 

b) the account remains ‘out of order’  in respect of an Overdraft/Cash Credit (OD/CC), 

c) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 

d) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, 

e) the instalment of principal or interest thereon remains overdue for one crop season for long duration crops. 

06. When we treat OCC/OD account as “Out of Order”? 

CC/OD account shall be treated as ‘out of order’ if: 

a) The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or 

b) The outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period. 

07. What is Overdue  status ? 

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. The borrower accounts shall be flagged as overdue by the banks as part of their day-end processes for the due date, irrespective of the time of running such processes. 

‘Previous 90 days period’ shall be inclusive of the day for which the day-end process is being run. 

08. What is Income Recognition Policy ? 

The policy of income recognition has to be objective and based on the record of recovery. Therefore, the banks should not charge and take to income account interest on any NPA. This will apply to Government guaranteed accounts also. 

However, interest on advances against Term Deposits, National Savings Certificates (NSCs), Kisan Vikas Patras (KVPs) and life insurance policies may be taken to income account on the due date, provided adequate margin is available in the accounts. 

In cases of loans where moratorium has been granted for repayment of interest, income may be recognised on accrual basis for accounts which continue to be classified as ‘standard’. 

09. What are norms related to Reversal of income ? 

If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. This will apply to Government guaranteed accounts also. 

If loans with moratorium on payment of interest (permitted at the time of sanction of the loan) become NPA after the moratorium period is over, the capitalized interest, if any, corresponding to the interest accrued during such moratorium period need not be reversed. 

In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past periods, if uncollected. 

10. What are the Norms related to charging Interest in respect of NPAs ?

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. However, banks may continue to record such accrued interest in a Memorandum account in their books. 

Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. 

For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account. 

11.  What are different Categories of NPAs ? 

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

 

(a) Substandard Assets 

(b) Doubtful Assets 

(c) Loss Assets

 

12. What are Substandard Assets ? 

A Substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 

13. What are Doubtful Assets ? 

An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. 

14. What are Loss Assets? 

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 

15. What are the Guidelines for classification of assets ? 

Classification of assets into NPA should be done taking into account the degree of well-defined credit weaknesses. The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise. 

16. What are the guidelines for classification in case of Accounts with temporary deficiencies ? 

The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit temporarily. 

17. When we can upgrade NPA into Standard ? 

The loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.  In case of borrowers having more than one credit facility from a bank, loan accounts shall be upgraded from NPA to standard asset category only upon repayment of entire arrears of interest and principal pertaining to all the credit facilities. 

18. What is NPI? 

A non-performing investment (NPI), similar to a non-performing advance (NPA), is one where:  Interest/ installment (including maturity proceeds) is due and remains unpaid for more than 90 days) 

19. If one entity has 4 credit facilities. Only one account is eligible for classification as NPA. Can we treat other 3 accounts as Standard ? 

Asset Classification to be borrower-wise and not facility-wise 

It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. 

20. How to treat Bills discounted under LC, when other accounts of the borrower are classified as NPA? 

The bills discounted under LC favouring a borrower may not be classified as a Nonperforming assets (NPA), when any other facility granted to the borrower is classified as  NPA. 

21. What are the norms for classification in respect of advances under Consortium Arrangements ? 

Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. 

22.  When we can classify the account directly as Doubtful Asset? 

Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 % of the value assessed by the bank or accepted by  RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category.

23. If Bills discounted under LC are not accepted or Bills not honoured on presentation, how to treat them when other accounts of the borrower are NPA? 

In case documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA. 

24. When we can classify the account directly as  Loss Asset? 

If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10% of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. 

25. What are the Provisioning norms in respect of cases of fraud ? 

Banks should normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts), immediately upon a fraud being detected. 

26. What are the guidelines to classify Advances  to PACS/FSS under On-lending Scheme ? 

In respect of advances to  PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is in default  be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS. 

27. What are the guidelines to classify Advances   against Term Deposits, NSCs, KVPs, etc. ? 

Advances against term deposits, NSCs eligible for surrender, KVPs and life insurance policies  need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. 

28. What are the guidelines to classify Loans with moratorium for payment of interest ? 

In the case of bank finance where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. 

29. What are the guidelines to classify Loans to Employees of Bank? 

In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates. 

Sekhar Pariti

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