Part 06 — Collections & Recovery

Provisioning P&L Impact

Collections numbers become finance numbers through provisioning. A missed instalment first affects collection efficiency and roll rates; then it affects income recognition, provisions, net non-performing assets (NNPA), capital and profit and loss (P&L). For SME lenders, the finance impact can arrive suddenly because delinquency is granular but provisioning is bucketed.

From Due To Provision

The chain is:

Due is raised in the loan management system (LMS).
Payment is not received by day-end; overdue flag and DPD start.
Account enters SMA bucket as per DPD.
At more than 90 days overdue for most term loans/bills, account becomes NPA.
Income accrual stops; unrealised income already booked is reversed.
Provision is computed based on asset class, security, ageing and entity-specific RBI directions.
P&L receives provision expense, income reversal and eventual write-off or recovery.

RBI says income recognition should be objective and based on record of recovery, and asset classification should be based on objective criteria. For banks, a term loan becomes NPA when interest and/or principal remains overdue for more than 90 days; CC/OD becomes NPA when out of order; and bills purchased/discounted become NPA when overdue for more than 90 days (RBI Master Circular on IRAC, April 1, 2025).

Income Reversal

The P&L hit is not only provision. Once an account becomes NPA, banks should not charge and take interest to income on that NPA. If interest was accrued and credited to income in past periods but not realised, it should be reversed. Fees, commission and similar income accrued on NPAs should cease accruing and be reversed if uncollected (RBI Master Circular on IRAC, paras 3.1-3.4, April 1, 2025).

Example:

Item	Amount
Principal outstanding	₹50,00,000
Accrued but unpaid interest booked earlier	₹2,40,000
Security value considered realisable	₹35,00,000
Account turns NPA	Day 91

The lender reverses the ₹2.40 lakh uncollected income if it was already booked. It then computes provision based on classification and security. Collections often sees only “₹52.4 lakh due”; finance sees income reversal, provision and capital consumption.

IRAC Provisioning

For banks, RBI’s IRAC master circular classifies NPAs into sub-standard, doubtful and loss assets. Sub-standard means NPA for up to 12 months; doubtful means it has remained sub-standard for 12 months; loss asset means identified as uncollectible though not fully written off (RBI Master Circular on IRAC, para 4.1, April 1, 2025).

Indicative bank provisioning logic:

Asset class	Provisioning logic in practice
Standard	General provision; SME direct advances often at lower standard provision than high-risk categories, subject to current RBI direction.
Sub-standard secured	Generally 15% on total outstanding.
Sub-standard unsecured	Higher provision, commonly 25% for unsecured exposure other than specified infrastructure carve-outs.
Doubtful up to 1 year	100% unsecured portion plus 25% secured portion.
Doubtful 1-3 years	100% unsecured plus 40% secured.
Doubtful over 3 years	100% unsecured plus 100% secured.
Loss asset	100% if not written off.

Provision rates differ by regulated entity, exposure category and updates. NBFCs under Scale-Based Regulation have their own directions, and Ind AS NBFCs also compute expected credit loss (ECL). The system should not hard-code a single rate table; it should version provisioning rules by entity type, product, asset class, security and effective date. See IRAC provisioning for the regulatory overview.

ECL Versus IRAC

Ind AS 109 uses ECL: expected credit loss estimated from probability of default (PD), loss given default (LGD), exposure at default (EAD), forward-looking information and staging. Stage 1 is 12-month ECL for performing assets; Stage 2 is lifetime ECL for significant increase in credit risk; Stage 3 is credit-impaired. RBI IRAC is more rule-based: DPD, NPA class, security and ageing.

In an NBFC P&L, both matter. Accounting profit follows Ind AS financial statements, but RBI prudential norms can require regulatory provisions/floors, disclosures and capital treatment. A 45-DPD SME loan may still be standard under IRAC but move to Stage 2 under ECL if risk has increased significantly. Conversely, an account at 91 DPD is NPA under IRAC even if a model says recovery probability is high because collateral is strong.

Banks are also moving. RBI issued the Reserve Bank of India (Commercial Banks - Asset Classification, Provisioning and Income Recognition) Directions, 2026 for an expected-credit-loss transition for commercial banks effective April 1, 2027; as of July 2026, everyday SME collections still needs precise DPD and IRAC discipline because NPA recognition and income controls remain operationally binding.

Worked Example: Unsecured Business Loan

Assume a ₹20 lakh unsecured business loan, 24-month tenor, 22% annual reducing rate, EMI roughly ₹1.04 lakh. Outstanding principal after 10 months is ₹12.8 lakh. Borrower misses March, April and May EMIs and crosses 90 DPD in June.

Operational effects:

Point	Effect
1-30 DPD	SMA-0; telecalling, PTP.
31-60 DPD	SMA-1; field visit and partner escalation.
61-90 DPD	SMA-2; legal/settlement screen.
91 DPD	NPA; income reversal and provision.

Finance effects: assume accrued unpaid interest of ₹70,000 was booked. It is reversed. If unsecured sub-standard provisioning is 25%, provision on ₹12.8 lakh is ₹3.2 lakh, subject to applicable rules and ECL already held. If ECL provision of ₹1.4 lakh was already held, incremental P&L provision may be ₹1.8 lakh plus income reversal. Later OTS at ₹8 lakh creates further write-off/adjustment against provision.

Worked Example: Secured LAP

Assume ₹1.2 crore LAP to a partnership firm, property valued at ₹2 crore at sanction, current forced-sale value estimated ₹1.45 crore, principal outstanding ₹1.05 crore, overdue interest ₹6 lakh. It becomes NPA at 91 DPD.

The asset is sub-standard secured. Provision may be lower than unsecured because realisable security supports recovery, but income reversal still applies. If the account remains NPA beyond 12 months and moves to doubtful, the secured portion starts attracting higher provision by ageing. A long SARFAESI dispute can therefore create rising P&L drag even when collateral exists.

This is why legal TAT affects finance. A secured account stuck for two years due to title dispute, borrower stay application or failed auctions consumes management bandwidth and provision, even if ultimate recovery is possible. See legal toolkit and repossession asset sale.

Provisioning And Collections Strategy

Collections should prioritise not just gross overdue but marginal P&L risk:

Account	Overdue	P&L urgency
₹8 lakh unsecured at 58 DPD	₹2.1 lakh	High: close to SMA-2/NPA, high unsecured provision.
₹1.5 crore LAP at 12 DPD	₹4.5 lakh	Medium: large exposure but collateral and early bucket.
₹40 lakh machinery loan at 86 DPD	₹7 lakh	Very high: NPA cliff and asset trace risk.
₹3 crore CC account with credits not covering interest for 80 days	Interest shortfall	Very high: out-of-order trigger near 90 days.

A good collections dashboard shows exposure at risk of incremental provision in the next 7, 15 and 30 days. Finance should reconcile provision movements with collections outcomes: cures, upgrades, slippages, write-offs, ARC sale and recoveries from written-off accounts.

DLG And Co-Lending

Default Loss Guarantee (DLG) does not remove provisioning responsibility. RBI’s Digital Lending Directions, May 8, 2025 state recognition of NPA and consequent provisioning remain the responsibility of the regulated entity; DLG invocation does not reduce borrower liability. In co-lending, each RE books its share and applies borrower-level classification for its exposure under the arrangement (Co-Lending Arrangements Directions, August 6, 2025).

The implication for systems is non-negotiable: DLG receivable, borrower dues, provision, partner share and cash recovery must be separate ledgers. Netting the guarantee against borrower overdue will understate delinquency and break regulatory reporting.