2.10 Asset classification, NPA, and provisioning

Rule summary

The Reserve Bank of India’s Income Recognition, Asset Classification and Provisioning (IRACP) norms for NBFCs prescribe how lenders must classify and provision for loans based on borrower’s repayment behaviour. The norms were significantly tightened in November 2021 with the move to daily asset classification and explicit overdue-day triggers.

This is the single most important regulatory framework for a lender’s financial reporting and credit-cost recognition.

Source citation

• RBI Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications, DOR.STR.REC.68/21.04.048/2021-22, dated 12 November 2021.
• RBI Master Direction – Non-Banking Financial Company – Scale Based Regulation Directions, 2023 (consolidates IRACP for NBFCs).
• RBI Prudential Framework for Resolution of Stressed Assets, dated 7 June 2019 (relevant for restructured assets).

Classification categories

Special Mention Accounts (SMA)

Category	Trigger
SMA-0	Principal or interest payment overdue between 1 and 30 days
SMA-1	Principal or interest payment overdue between 31 and 60 days
SMA-2	Principal or interest payment overdue between 61 and 90 days

Non-Performing Assets (NPA)

A loan is classified as NPA when:

• Interest and/or principal remain overdue for a period of more than 90 days (for term loans, including working-capital lines).
• Special triggers for specific products (cash credit / overdraft — out of order; bills — overdue beyond 90 days; agricultural loans — by harvest season; etc.).

NPA sub-classification (asset quality)

Once classified NPA, the loan moves through sub-categories:

Sub-category	Trigger
Sub-standard	Has remained NPA for a period <= 12 months
Doubtful	Has remained NPA for a period > 12 months; further sub-divided: D1 (NPA <= 1 year beyond sub-standard), D2 (NPA 1 – 3 years beyond), D3 (NPA > 3 years beyond)
Loss	Loss has been identified by the NBFC or its auditor or RBI inspection, but the amount has not been written off wholly

The daily classification rule (Nov 2021)

The November 2021 circular clarified two crucial points that materially tightened practice:

1. Daily classification. The classification must be done on a borrower-account basis at the end of the day, with the “days overdue” counter running on calendar days from due date.
2. Upgrade only on full clearance. An NPA account can be upgraded to Standard only when the entire arrears of interest and principal are paid in full. Earlier loose practice of partial-payment upgrade is explicitly disallowed.

The borrower-account view is the unit. If a borrower has multiple loans, all loans of a borrower are classified by the worst-performing one in many practical interpretations (though specific product treatment varies).

Provisioning grid (NBFC, secured assets)

Category	Provisioning rate (broad guide; specific category percentages per Master Direction)
Standard	0.25% – 0.40% depending on sub-segment
Sub-standard	10%
Doubtful – D1	100% on unsecured + 20% on secured
Doubtful – D2	100% on unsecured + 30% on secured
Doubtful – D3	100% on unsecured + 50% on secured
Loss	100%

For unsecured loans (which is the SME WC wedge), provisioning is steeper because there is no secured recovery cushion. The actual percentages and segment definitions are in the SBR Master Direction; treat the table as orientation.

Additional standard-asset provisioning is required for certain sub-sectors and unsecured personal loans. RBI has periodically raised standard-asset provisioning for unsecured loans (e.g., the November 2023 circular raising risk weights and provisioning for consumer credit by NBFCs and banks).

Income recognition

• For Standard assets: interest income recognised on accrual basis.
• For NPA assets: interest income recognised only on cash basis (actual receipt). Accrued-but-uncollected interest must be reversed if the loan turns NPA.
• For restructured assets: special rules apply per the Prudential Framework for Resolution.

Write-offs and recovery

• Loss assets are written off after appropriate provisioning.
• Written-off loans continue to be legally enforceable — write-off is an accounting action, not a legal forgiveness.
• Recovery from written-off assets is recognised as income on cash basis.

Restructured / rescheduled loans

• Per RBI’s Prudential Framework for Resolution of Stressed Assets, any restructuring (extension of tenure, change in interest rate, conversion to equity, etc.) of a loan before NPA classification leads to immediate downgrade to NPA, with provisioning.
• After resolution, the loan can be upgraded only after meeting performance criteria for the specified observation period.

This is the regulator’s safeguard against “evergreening” — masking distress by repeatedly restructuring without recognising the loss.

Product implications

• No “soft” overdue treatment — every day overdue counts.
• Borrower-level view — the system must view a borrower across all their loans for classification logic.
• Co-lending lockstep — both lenders must classify the same loan in the same bucket.
• Upgrade discipline — partial repayments don’t upgrade; the system must enforce.

System implications

• Daily classification job — runs end-of-day; computes DPD for every loan; updates SMA / NPA status.
• DPD computation engine — handles weekends, holidays, due-date holidays, partial payments correctly.
• Provisioning engine — runs against the asset book to compute provisioning per category.
• Interest accrual freezer — when a loan moves to NPA, freeze accrual; reverse accrued-but-uncollected from previous period.
• Upgrade workflow — manual approval that arrears are fully paid, then upgrade with the full audit trail.
• Restructuring workflow — flag the loan as restructured, downgrade per rules, track observation period.
• Borrower-level aggregation — for borrowers with multiple loans, compute borrower-worst classification.

Documents that must be generated

• Daily asset classification statement.
• Monthly provisioning schedule.
• Quarterly NPA report for board and RBI.
• Restructuring documentation per case.

Workflow that must exist

• Daily classification batch.
• NPA notification to compliance / risk / collections.
• Upgrade approval workflow (maker-checker, evidence of full clearance).
• Restructuring approval workflow (board / credit committee).

Reports that must be produced

• Standard / SMA-0 / SMA-1 / SMA-2 / NPA breakdown by product, segment, geography, vintage.
• Provisioning schedule monthly.
• Roll-rate analysis SMA-0 → 1 → 2 → NPA.
• Bureau submission file with classification.
• Bank submission for co-lent loans.
• Restructured loan report with observation status.

Audit evidence required

• Daily classification logs.
• Provisioning workings.
• NPA case files.
• Restructuring approvals and observation evidence.
• Upgrade approvals with full-payment evidence.

Sources

• RBI IRACP Clarification, DOR.STR.REC.68/21.04.048/2021-22, 12 November 2021.
• RBI NBFC – Scale Based Regulation Directions, 2023 (consolidated IRACP).
• RBI Prudential Framework for Resolution of Stressed Assets, 7 June 2019.
• RBI Regulatory measures towards Consumer Credit and Bank Credit to NBFCs, DOR.STR.REC.57/21.06.001/2023-24, 16 November 2023 (raised risk weights and provisioning on certain unsecured exposures).