2.10.1 IRACP — edge cases and operational specifics

Why this page exists

The headline IRACP rules — SMA-0/1/2 buckets, 90-day NPA, provisioning grid — are covered in 2.10 Asset classification, NPA, provisioning. They handle the plain vanilla case: a single performing loan, single borrower, no restructuring, no special borrower category.

In practice, every NBFC’s book has dozens of situations that fall outside the headline rules: restructured loans, fraud accounts, agricultural loans with crop seasons, co-lent loans with partner timing differences, technical write-offs versus prudential write-offs, multi-loan borrowers with mixed performance, and the upgrade-after-cure scenario. These are where audit findings most often surface.

This page catalogues each.

Source

• RBI Master Direction – NBFC – Scale Based Regulation Directions, 2023 (consolidated IRACP).
• RBI Prudential Framework for Resolution of Stressed Assets, DBR.No.BP.BC.45/21.04.048/2018-19, dated 7 June 2019.
• 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 circular on fraud reporting and classification — DBS.CO.CFMC.BC.No.1/23.04.001/2016-17, 1 July 2016 (as updated for NBFCs).

Restructured assets

Trigger

Any modification of original loan terms — interest rate concession, tenure extension, principal moratorium, conversion of unpaid interest into a new loan, conversion to equity — for reasons of borrower financial difficulty constitutes a restructuring under the Prudential Framework.

Immediate consequences

• If a standard asset is restructured before classification as NPA, it is immediately downgraded to NPA unless the restructuring falls within the special carve-outs (e.g., MSME restructuring under the One-Time Restructuring Schemes, where extant).
• A previously NPA asset that is restructured continues to be NPA.
• Provisioning is upgraded per the prudential grid for the downgraded category.

Special MSME restructuring schemes

RBI has periodically issued special MSME restructuring windows that allow restructuring of standard MSME accounts to continue as standard (subject to specific eligibility, exposure caps, observation period):

• The MSME Restructuring Framework of January 2019 (DBR.No.BP.BC.18/21.04.048/2018-19).
• The Covid Resolution Frameworks of 2020 and 2021 (DOR.No.BP.BC/3/21.04.048/2020-21 and successor).
• Future special schemes per RBI’s circumstantial response.

These are time-bound and eligibility-bound. When such a scheme is in force, the platform must:

• Tag each eligible loan to the scheme.
• Enforce eligibility caps (typically aggregate exposure <= ₹X Cr per borrower).
• Track the observation period — typically 1 year post-restructuring of satisfactory performance, after which the loan can be upgraded.
• Apply the scheme-specific provisioning (often higher than standard, lower than NPA).

Observation period and upgrade

After a Prudential Framework restructuring:

• The asset stays in its downgraded classification for the observation period.
• Satisfactory performance (typically 1 year of regular servicing) qualifies for upgrade.
• Upgrade requires explicit credit committee approval and full audit trail.

Repeated restructuring

A loan restructured a second time during the life of the original loan is treated as a fresh stress event and is downgraded again, with rigorous scrutiny in audit. This is the regulator’s safeguard against evergreening — masking distress by repeated restructuring.

Fraud accounts

Classification

Any loan that the NBFC’s Fraud Identification Committee or external investigation classifies as fraud (suspected or established) follows distinct rules:

• The account is immediately classified as NPA if not already.
• 100% provisioning is required on the principal and on accrued / uncollected interest.
• The loan is flagged in bureau as a fraud account in the next monthly submission.
• The loan is reported to RBI via the prescribed fraud reporting return (FMR — Fraud Monitoring Return — for banks; the NBFC equivalent).
• Recovery efforts continue independent of provisioning.

Reporting timelines

• Initial fraud report to RBI within 21 days of detection (for banks; NBFCs have analogous timelines per their reporting MD).
• Quarterly fraud return.
• Annual fraud disclosure in board report.

Platform implications

• A separate Fraud Identification Committee function with documented charter.
• Workflow for investigation, evidence collection, classification decision.
• Once classified, automatic provisioning + classification + reporting downstream.
• No upgrade from fraud classification under any circumstance other than reversal of fraud finding.

Agricultural loans

Definition

For PSL and IRACP purposes, an agricultural loan is one extended to a farmer or farming activity per the PSL Master Direction’s agricultural categories.

NPA triggers

For agricultural loans, the NPA timeline is harvest-season-aligned rather than the 90-day standard:

• Short-duration crops (one cropping cycle in the year): NPA if two crop seasons of overdue.
• Long-duration crops (more than one year per cycle): NPA if one crop season overdue.

The platform’s classification engine must handle this when agricultural loans are part of the portfolio (rare for SME WC but relevant if you expand into Kisan Credit Card-adjacent products).

Co-lent loan classification

Lockstep rule

Both lenders in a co-lending arrangement must classify the borrower’s loan in the same bucket at the same time. There is no scenario where one lender’s share is Standard while the other’s share is NPA.

Operational implementation

• Daily classification job uses a single source of truth for the borrower’s DPD.
• The classification event triggers updates at both lenders’ systems via the co-lending MIS.
• A classification mismatch in audit is a serious finding — both NBFC and partner are at risk.

Income recognition for co-lent loans

• Interest accrual freezes on NPA for both lenders simultaneously.
• Accrued-uncollected interest is reversed proportionally on each lender’s books.

Multi-loan borrower

Borrower-level view

When a borrower has multiple loans (e.g., a revolving WC line + a separate invoice-backed line + an SCF facility), the classification approach depends on the lender’s policy and the regulator’s interpretation:

• Loan-level classification — each loan classified independently based on its own DPD. This is the common operational practice.
• Borrower-level downgrade — many lenders and the regulator’s substance view suggests that if a borrower defaults on one facility, all facilities of that borrower may need downgrade, because the borrower has demonstrated stress.

The conservative interpretation, particularly for unsecured retail / MSME exposure, is that all loans of a borrower downgrade when any loan turns SMA-2 (and certainly when any loan turns NPA). This is captured as a board-approved policy and enforced in the platform.

The audit trail must show how the borrower-level view is computed and applied.

Technical write-off vs prudential write-off

Technical write-off

The lender writes off the loan from its books (i.e., removes from the balance sheet) but legally still owns the recovery rights. Recovery efforts continue; any recovery is recognised as income on cash basis.

• Done after full provisioning is in place.
• Board / credit committee approval required.
• Reported in the technical write-off register.

Prudential write-off

Effectively the same as technical write-off from an accounting standpoint, with the distinction that prudential write-off implies the lender judges recovery probability to be very low (vs technical write-off being more administrative — e.g., for very small balances).

Implications

• Write-off reduces book size and adjusts capital adequacy.
• Recovery post-write-off boosts P&L on cash basis.
• Bureau reporting reflects write-off but the borrower’s credit history continues to show the write-off for 7 years typically.
• Legal recovery via SARFAESI (if secured), arbitration, or civil suit continues.

Upgrade discipline (post Nov 2021 clarification)

The Nov 2021 IRACP clarification was strict on upgrade:

• An NPA can be upgraded to Standard only when the entire arrears of interest and principal are paid in full by the borrower.
• Partial payments do not upgrade — they reduce overdues but the account stays NPA.
• For a borrower whose loan was restructured, the upgrade to Standard happens only after satisfactory performance during the observation period (typically 1 year), not on partial settlement.

The platform’s upgrade workflow must enforce this: full-payment evidence + manual approval + audit trail. Pre-Nov-2021 loose practice of upgrading on partial cure is explicitly disallowed.

Borrower with NPI / non-credit-impaired vs IRACP

IndAS 109 distinctions

For IndAS-applicable entities (broadly NBFCs above asset thresholds), the IndAS 109 framework introduces:

• Stage 1: 12-month expected credit loss (ECL) for performing loans.
• Stage 2: lifetime ECL for loans with significant credit deterioration but not credit-impaired.
• Stage 3: lifetime ECL for credit-impaired loans (broadly NPA).

The IRACP norms and IndAS 109 are applied in parallel. For NBFCs subject to IndAS, both classifications and provisioning are computed; the higher of the two provisioning amounts is recognised. This means IRACP is the floor, not a substitute for ECL.

Implications

• ECL feeds management accounting and IFRS-equivalent reporting.
• IRACP feeds regulatory reporting and prudential capital adequacy.
• Both run in the platform; reconciliation between the two is a finance team’s monthly task.

Borrower forced into restructuring by a co-lender

A borrower has multi-lender exposure. One lender restructures the borrower’s loan with that lender, triggering NPA at that lender. Does that automatically trigger NPA at your platform for the same borrower’s separate loan?

The conservative answer: yes, if the multi-lender exposure exceeds materiality thresholds. The borrower has demonstrated stress; the borrower-level view must be applied. This is operationally a bureau-feed-driven trigger — when the bureau reports another lender’s restructuring or NPA for the same borrower, the platform’s risk engine raises an EWS and the credit team triages.

Transfer of assets between products

If a borrower’s loan is converted from one product to another within the platform (e.g., revolving WC line converted to term loan during restructuring), this conversion is a restructuring event subject to all the above rules. It is not a clean “new loan” from a regulatory standpoint.

Sources

• RBI NBFC – Scale Based Regulation Directions, 2023 (IRACP norms consolidated).
• RBI IRACP Clarification, DOR.STR.REC.68/21.04.048/2021-22, 12 November 2021.
• RBI Prudential Framework for Resolution of Stressed Assets, 7 June 2019.
• RBI fraud reporting circulars (latest applicable version on rbi.org.in).
• RBI MSME Restructuring schemes (time-bound; check current applicability at rbi.org.in).
• IndAS 109 — text in the Companies (Indian Accounting Standards) Rules, 2015, as amended, at mca.gov.in.