NPA and Asset Classification (IRAC Norms)
When a loan becomes an NPA, sub-standard, doubtful and loss categories, provisioning rates and the move to Expected Credit Loss from April 2027.
Key points
- A term loan becomes a Non-Performing Asset (NPA) when interest or instalment remains overdue for more than 90 days.
- A cash credit / overdraft becomes NPA when it remains out of order for more than 90 days.
- NPAs are classified as Sub-standard (NPA up to 12 months), Doubtful (sub-standard for 12 months) and Loss.
- Asset classification is borrower-wise, not facility-wise.
- RBI's Expected Credit Loss (ECL) framework applies from 1 April 2027; the 90-day NPA definition continues.
Why IRAC norms matter
Income Recognition, Asset Classification and Provisioning (IRAC) norms tell a bank when to stop booking interest on a loan, how to classify it, and how much money to set aside against possible loss. They make balance sheets comparable across banks and keep profits from being overstated.
When does an account become NPA?
| Type of facility | NPA when… |
|---|---|
| Term loan | Interest and/or instalment of principal remains overdue for more than 90 days. |
| Cash credit / Overdraft | The account remains "out of order" for more than 90 days. |
| Bills purchased / discounted | The bill remains overdue for more than 90 days. |
| Agricultural loan – short-duration crops | Instalment or interest remains overdue for two crop seasons. |
| Agricultural loan – long-duration crops | Instalment or interest remains overdue for one crop season. |
"Out of order"
A CC/OD account is out of order if the outstanding balance remains continuously above the sanctioned limit or drawing power for 90 days, or if the balance is within the limit but there are no credits continuously for 90 days, or the credits are not enough to cover the interest debited in the same period.
SMA classification (early warning)
| Category | Overdue period (term loans) |
|---|---|
| SMA-0 | Up to 30 days |
| SMA-1 | More than 30 and up to 60 days |
| SMA-2 | More than 60 and up to 90 days |
Banks flag borrowers on a day-end basis, so an account can slip into SMA or NPA status on the very day the threshold is crossed.
Asset classification and provisioning
| Category | Meaning | Provision |
|---|---|---|
| Standard | Performing asset | Generally 0.40%; 0.25% for direct agriculture and SME advances; 1% for commercial real estate (0.75% for CRE–Residential Housing) |
| Sub-standard | NPA for a period up to 12 months | 15% of outstanding; 25% for unsecured exposures |
| Doubtful D1 | Up to 1 year in doubtful category | 25% of secured portion + 100% of unsecured portion |
| Doubtful D2 | 1 to 3 years in doubtful category | 40% of secured portion + 100% of unsecured portion |
| Doubtful D3 | More than 3 years in doubtful category | 100% |
| Loss | Loss identified, but not written off wholly | 100% |
Income recognition
- Interest on NPAs is recognised only when actually received, not on accrual.
- When an account turns NPA, interest already booked but not collected is reversed.
- Asset classification is borrower-wise: if one facility of a borrower is NPA, all facilities of that borrower are treated as NPA.
Looking ahead: Expected Credit Loss (ECL)
RBI has finalised an Expected Credit Loss based framework that takes effect on 1 April 2027. Instead of waiting for a loss to be incurred, banks will provide on a forward-looking basis in three stages:
- Stage 1 – no significant increase in credit risk; provision for 12-month expected loss.
- Stage 2 – significant increase in credit risk; provision for lifetime expected loss.
- Stage 3 – credit-impaired assets.
The 90-day overdue definition of NPA is retained, and RBI has provided transition arrangements to soften the one-time capital impact.