Part 02 — RBI Regulatory Framework

IRAC Provisioning

Income Recognition and Asset Classification (IRAC) is the discipline that converts repayment behaviour into accounting, provisioning and collections action. It is the reason a one-day delay matters operationally, why 90 days past due (DPD) is a cliff, and why a borrower with several facilities cannot be treated as standard in one account and NPA in another simply because one EMI is current.

DPD, SMA and NPA

DPD counts the number of days a payment remains overdue after its due date. RBI’s Special Mention Account (SMA) framework is an early-warning ladder before Non-Performing Asset (NPA) classification:

Bucket	Trigger for term loans and most SME facilities
SMA-0	Principal or interest overdue up to 30 days; also qualitative stress signs.
SMA-1	Overdue more than 30 days and up to 60 days.
SMA-2	Overdue more than 60 days and up to 90 days.
NPA	Overdue more than 90 days.

For cash credit/overdraft (CC/OD), out-of-order rules apply, including continuous excess over limit/drawing power or absence of credits sufficient to cover interest. Working-capital loans therefore need stock statements, drawing power, renewal dates and interest-servicing checks, not just EMI logic. See working capital products and monitoring EWS.

RBI’s older commercial-bank IRAC master circulars were consolidated in 2025 into modular entity-wise directions, and in April 2026 RBI issued a new expected-credit-loss transition framework for commercial banks effective April 1, 2027. As of July 2026, ordinary operational NPA recognition for SME loans still uses the 90-DPD discipline; the future ECL framework changes provisioning architecture for banks from FY 2027-28, not the need to track DPD precisely.

Borrower-Level Classification

IRAC is borrower-level, not account-level, for the same lender. If a borrower has a term loan, cash credit and equipment loan with the same bank and one facility becomes NPA, the other facilities are normally classified consistently. RBI’s 2025 co-lending framework extends this discipline across co-lenders: any change in asset classification by one RE has to be communicated to the other, and borrower-level classification applies in each RE’s books under the co-lending arrangement.

This has a system consequence. The LMS must maintain borrower_id, linked facilities, co-borrowers and guarantors. Delinquency should not be calculated only at loan-account ID. A collections queue that misses linked facilities will understate exposure, suppress NPA triggers and misreport CIC data.

Income Recognition

For standard assets, interest is accrued as per accounting norms. Once an asset is NPA, income such as interest, discount, hire charges or lease rentals is recognised only when actually realised. Unrecovered income already booked before the account became NPA must be reversed. This is why a loan can look profitable in month 6 and then hit P&L in month 10 when delinquency crosses NPA and income reversal/provisioning catches up.

NBFCs applying Ind AS also compute Expected Credit Loss (ECL), but RBI prudential requirements still create floors and reserves. A fintech-style “low loss because DLG covers first 5%” view is wrong. The Digital Lending Directions, 2025 say the RE remains responsible for NPA recognition and provisioning irrespective of DLG cover; DLG invocation does not reduce borrower liability and cannot be reinstated after recovery.

Provisioning Percentages

Indicative RBI prudential provisioning for traditional IRAC remains:

Asset class	Typical provision logic
Standard assets	General provision, often 0.25-1.00% depending on category and entity type; SME and housing categories can have lower standard provisions than commercial real estate.
Sub-standard	Generally 15% on secured exposure; unsecured portions can require higher provision.
Doubtful up to 1 year	100% of unsecured portion plus 25% of secured portion.
Doubtful 1-3 years	100% unsecured plus 40% secured.
Doubtful over 3 years	100% unsecured plus 100% secured.
Loss asset	100%, or written off.

Provisioning details differ by regulated entity and current direction. The table is a practitioner guide, not a substitute for the applicable RBI direction for commercial banks, SFBs, RRBs, UCBs, NBFCs or HFCs. For a software blueprint, store provision method/version as configuration because the rates and entity-specific rules change.

Upgradation and Restructuring

NPA accounts may be upgraded only after arrears of interest and principal are paid. “One EMI collected” is not enough if earlier arrears remain. For borrowers with multiple facilities, all arrears across facilities must be cleared before upgrade. Technical write-off does not convert the remaining exposure into standard.

Restructuring is a separate event. If a lender grants moratorium, tenor extension, rate reduction, overdue conversion into funded interest term loan or other relief because of borrower financial difficulty, the account may attract restructuring rules under RBI’s stressed asset framework. MSME restructuring windows used during COVID and earlier stress cycles had specific eligibility cut-offs and reporting requirements; those should not be treated as evergreen standing policy. In current practice, a restructuring proposal needs viability assessment, Board-approved policy, asset classification impact, additional provisioning where required and borrower consent.

Why IRAC Drives Operations

SMA-1 and SMA-2 are not accounting labels only. They should trigger collections, early-warning review, stock-statement follow-up, covenant breach notice, partner alerts, field visit or credit review depending on product. Typical unsecured SME roll rates from 30+ to 90+ can range widely by segment; a weak digital book may see 20-35% of 30+ roll into 90+, while a secured LAP book with active field collections may be much lower. These are market-practice ranges and must be validated against the lender’s vintage curves.

For related workflows see delinquency fundamentals, provisioning P&L impact and portfolio analytics.