For a commercial bank, the governing text is the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, dated November 28, 2025 and updated as on October 1, 2026 (the IRAC Directions). IRAC stands for income recognition, asset classification and provisioning. Paragraph 3 excludes small finance banks, payments banks and local area banks. This piece rests on that direction alone, so do not read its rates or paragraph numbers across to any other lender type.
| Lender type | Position under paragraph 3 of the IRAC Directions |
|---|---|
| Banking companies, other than the three types excluded below | Covered |
| Corresponding new banks | Covered |
| State Bank of India | Covered |
| Small finance banks | Expressly excluded |
| Payments banks | Expressly excluded |
| Local area banks | Expressly excluded |
| NBFCs, housing finance companies, co-operative banks, regional rural banks | Not named. Check the applicability paragraph of the text that covers your lender type |
Why it matters for underwriters
Classification starts with the sanction terms. Paragraph 12 of the IRAC Directions requires realistic repayment schedules based on cash flows, fixed in consultation with the borrower.
The loan agreement has to carry the detail. For loans sanctioned on or after December 31, 2021, paragraph 13 of the IRAC Directions requires exact due dates, repayment frequency, the principal and interest breakup, and examples of special mention account (SMA) and non-performing asset (NPA) dates. Where there is a moratorium, the agreement must state the exact date repayment starts. Older loans must comply when they come up for renewal or review (paragraph 14 of the IRAC Directions).
The security you record affects the later provision. Paragraph 5(10) of the IRAC Directions counts only tangible security properly charged to the bank. Guarantees, including State government guarantees, and comfort letters do not count as security.
A slip is expensive. Under the IRAC Directions, the standard asset provision of 0.25 or 0.40 per cent on most retail and MSME lending moves to at least 15 per cent, accrual stops, and uncollected interest is reversed.
How it works
All references in this section are to the IRAC Directions, which apply to commercial banks as defined in paragraph 3.
When an account becomes an NPA
| Facility | NPA trigger | Paragraph of the IRAC Directions |
|---|---|---|
| Term loan | Interest or principal instalment overdue for more than 90 days | 42(1) |
| Overdraft or cash credit | Account stays out of order | 42(2), 5(7) |
| Bills purchased and discounted | Bill overdue for more than 90 days | 42(4) |
| Regular or ad hoc limits | Not reviewed or renewed within 180 days of the due date or ad hoc sanction date | 42(5) |
An overdraft or cash credit account is out of order if any one of these holds:
- The balance stays above the limit or drawing power continuously for 90 days.
- The balance is below the limit or drawing power, but there are no credits continuously for 90 days.
- The balance is below the limit or drawing power, but credits do not cover the interest debited during the previous 90 days.
This test applies to every credit product offered as an overdraft, including those not meant for business use. So a home loan or personal loan structured as an overdraft follows this test, not the term loan one.
Classification runs in the day-end process and the date is the calendar date of that run (paragraphs 30 and 31 of the IRAC Directions). Illustration I in paragraph 31 uses a March 31, 2021 due date: SMA-1 on April 30, SMA-2 on May 30 and NPA on June 29.
Classification is borrower-wise, not facility-wise (paragraph 44 of the IRAC Directions). It rests on the record of recovery (paragraph 45). Security or net worth does not keep an account out of NPA (paragraph 46).
NPA categories and provisions
| Category | Meaning | Minimum provision |
|---|---|---|
| Substandard | NPA for twelve months or less | 15 per cent of total outstanding. 25 per cent if the exposure is unsecured |
| Doubtful, up to one year | Has remained substandard for twelve months | 100 per cent of the unsecured part, plus 25 per cent of the secured part |
| Doubtful, one to three years | As above | 100 per cent of the unsecured part, plus 40 per cent of the secured part |
| Doubtful, more than three years | As above | 100 per cent of the outstanding |
| Loss | Loss identified, not fully written off | Should be written off. If it stays on the books, 100 per cent |
An exposure is unsecured when the realisable value of the security is not more than ten per cent of the outstanding exposure, ab initio (paragraph 5(13) of the IRAC Directions).
Ages can be skipped. If realisable value falls below fifty per cent of the value assessed by the bank or accepted by the Reserve Bank at its last inspection, the NPA may go straight to doubtful. If it falls below ten per cent of the outstanding, the security is ignored and the asset goes straight to loss (paragraphs 67 and 68 of the IRAC Directions).
Standard asset provisions under paragraphs 80, 81 and 116 of the IRAC Directions are:
| Standard asset | Rate (per cent) |
|---|---|
| Individual housing loans, small and micro enterprises, farm credit | 0.25 |
| Medium enterprises | 0.40 |
| Housing loans at teaser rates | 2.00, reverting to 0.40 one year after the reset if the account stays standard |
| Commercial real estate | 1.00 |
| Commercial real estate, residential housing | 0.75 |
| All other loans and advances | 0.40 |
Personal loans are not listed separately, so they fall in the last line unless a specific paragraph applies.
These rates are the regulatory minimum (paragraph 100 of the IRAC Directions). A bank may go higher under its Board approved policy, so actual rates vary by institution.
Income and upgrade
Income accrues only on standard accounts. Others move to a cash basis (paragraphs 124 and 125 of the IRAC Directions). When an account turns NPA, the bank reverses interest charged but not collected, stops applying interest, and keeps a record in a memorandum account (paragraphs 132 and 133).
An NPA can return to standard only when all arrears of interest and principal are paid, across all of the borrower’s facilities with the bank (paragraphs 69 and 71 of the IRAC Directions). Upgrades of accounts that became NPAs through restructuring or a missed date of commencement of commercial operations must also meet the Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 (paragraph 70 of the IRAC Directions).
India specifics
The IRAC Directions point to companion directions, each written for commercial banks.
| Question | Reserve Bank of India (Commercial Banks – …) Directions, 2025 |
|---|---|
| Restructured accounts, meaning of default and credit event | Resolution of Stressed Assets |
| Definitions of commercial real estate, project finance, financial closure | Credit Facilities |
| Definition of wilful defaulter | Treatment of Wilful Defaulters and Large Defaulters |
| Classification and provisions on loan transfers | Transfer and Distribution of Credit Risk |
| Securitisation liquidity facilities | Securitisation Transactions |
| Notes to Accounts disclosures | Financial Statements: Presentation and Disclosures |
The IRAC Directions have been amended three times since issue. Paragraph numbers in this table are theirs.
| Amending direction | Effective | Change to the IRAC Directions |
|---|---|---|
| Amendment Directions, 2025, dated December 4, 2025 | January 1, 2026 | Paragraph 117 deleted |
| Amendment Directions, 2026, dated April 29, 2026 | July 1, 2026 | Paragraphs 57(4) and 80(6) deleted. Paragraphs 62A, 62B, 84A to 84D, 139A and 139B inserted |
| Second Amendment Directions, 2026, dated July 16, 2026 | October 1, 2026 | Paragraphs 139C and 139D inserted, on Specified Non-Financial Assets |
The April 2026 insertions in the IRAC Directions deal with resolution plans under Chapter VI-A of the Resolution of Stressed Assets Directions. A standard account may stay standard on implementation. An account that slipped between the calamity and implementation is upgraded on implementation (paragraph 62A of the IRAC Directions). The bank holds an additional specific provision of five per cent of outstanding debt, over and above prudential provisions and capped at a total of 100 per cent (paragraph 84A of the IRAC Directions). It may be written back once the borrower has paid at least 20 per cent of outstanding debt, without slipping to NPA or being restructured again (paragraph 84C of the IRAC Directions).
Guarantee cover works differently by scheme:
| Cover | Treatment under the IRAC Directions | Paragraph of the IRAC Directions |
|---|---|---|
| CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises), CRGFTLIH (the low income housing trust), NCGTC (National Credit Guarantee Trustee Company) | No provision on the guaranteed portion. The excess follows normal NPA provisioning | 111 |
| ECGC (Export Credit Guarantee Corporation) | No allowance on substandard assets. On doubtful assets, provide only on the balance above the guaranteed amount | 85, 110 |
| Central Government | Overdue account is an NPA only when the guarantee is repudiated on invocation. Income recognition is not exempted | 58 |
| State Government | Normal treatment once overdue for more than 90 days | 58 |
Large NPAs carry extra verification. Under paragraphs 22 and 23 of the IRAC Directions, a commercial bank must get an external stock audit every year on NPAs with a balance of ₹5 crore and above, and must have immovable collateral on those accounts valued once in three years.
Worked example, made-up numbers
A small enterprise owner has three facilities with one commercial bank, all on term loan structures. The term loan instalment due on January 15, 2026 goes unpaid and the account stays overdue. Following Illustration I in the IRAC Directions, the NPA date is April 15, 2026. The home loan and personal loan are current, but all three become NPAs because classification is borrower-wise. Assume no guarantee cover, no teaser rate and no interest suspense balance.
| Facility | Outstanding (₹ lakh) | Standard rate | Standard provision (₹ lakh) | Substandard rate | Substandard provision (₹ lakh) |
|---|---|---|---|---|---|
| Small enterprise term loan, secured | 60.00 | 0.25% | 0.150 | 15% | 9.00 |
| Home loan, secured | 30.00 | 0.25% | 0.075 | 15% | 4.50 |
| Personal loan, unsecured | 5.00 | 0.40% | 0.020 | 25% | 1.25 |
| Total | 95.00 | 0.245 | 14.75 |
One missed instalment takes the minimum provision on this borrower from ₹0.245 lakh to ₹14.75 lakh. If ₹1.20 lakh of accrued interest is uncollected, that amount is also reversed.
Now age the term loan alone, with realisable security of ₹45 lakh against the ₹60 lakh outstanding.
| Time in doubtful | Unsecured ₹15 lakh at 100% | Secured ₹45 lakh | Total provision (₹ lakh) |
|---|---|---|---|
| Up to one year | 15.00 | 25% = 11.25 | 26.25 |
| One to three years | 15.00 | 40% = 18.00 | 33.00 |
| More than three years | 15.00 | 100% = 45.00 | 60.00 |
If the borrower clears the term loan arrears but leaves ₹0.30 lakh of personal loan arrears unpaid, no facility is upgraded.
Pitfalls
Each point below concerns commercial banks under the IRAC Directions.
- Reading across lender types. A small finance bank is outside the IRAC Directions under paragraph 3, so citing them as its authority is wrong even if a rule looks familiar.
- Miscounting the 90 days. In Illustration I in paragraph 31 of the IRAC Directions, the NPA date of June 29, 2021 falls 90 calendar days after the March 31, 2021 due date. Test your system’s dates against that illustration.
- Treating a stressed account as facility-level. Under paragraph 44 of the IRAC Directions, one irregular facility pulls in the borrower’s other facilities with the bank, subject to specific cases such as paragraph 50 of the same direction on bills discounted under a letter of credit.
- Citing repealed instructions. Paragraph 144 of the IRAC Directions repeals earlier instructions on this subject for commercial banks. Actions already taken under them stay governed by them (paragraph 145 of the IRAC Directions).
- Applying new project provisions to old projects. The rates in paragraph 109 of the IRAC Directions do not apply where financial closure was achieved as on October 1, 2025, unless a fresh credit event is resolved or material terms change after that date.
- Assuming a temporary deficiency is an NPA, or that it can run on. Paragraph 45 of the IRAC Directions says a late stock statement or non-renewal on the due date alone should not trigger NPA status. But the 180-day review limit in paragraph 42(5) still applies, and outstanding based on stock statements older than three months is deemed irregular (paragraph 15 of the IRAC Directions).
- Relying on a credit just before the balance sheet date. Where data shows inherent weakness, the account is deemed NPA. In genuine cases, the bank must give auditors or inspecting officers satisfactory evidence of how it was regularised (paragraphs 47 to 49 of the IRAC Directions).
- Overriding the system casually. Under paragraph 38 of the IRAC Directions, manual override is an exception. It needs at least two level authorisation, an audit trail and system generated logs stored for at least three years.
- Treating a partial write-off as a cure. After a partial or technical write-off, the remaining balance cannot be shown as standard (paragraph 72 of the IRAC Directions).
- Assuming a required coverage ratio. Paragraph 121 of the IRAC Directions says the Reserve Bank has prescribed no regulatory minimum provisioning coverage ratio, the ratio of provisions to gross NPAs, for a commercial bank. The level is left to the bank’s discretion.
Checklist
- Confirm your institution fits paragraph 3 of the IRAC Directions before citing them.
- Use the version of the IRAC Directions updated as on October 1, 2026, and check the amendment footnotes.
- Check the agreement states due dates, frequency, principal and interest breakup, and SMA and NPA date examples.
- For moratorium loans, check the exact repayment start date is stated.
- Identify whether each facility is a term loan or an overdraft, because the NPA test differs.
- List all the borrower’s facilities with the bank, since classification and upgrade are borrower-wise.
- Record only tangible, properly charged security as security, and hold guarantee cover separately.
- Check whether the exposure is unsecured under paragraph 5(13) of the IRAC Directions from the start.
- Check realisable value against the fifty per cent and ten per cent tests in paragraph 68 of the IRAC Directions.
- For restructured or Chapter VI-A accounts, read the Resolution of Stressed Assets Directions alongside the IRAC Directions.
- Apply your bank’s Board approved rates where they exceed the regulatory minimum.
Sources
- Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, rbi.org.in, accessed 2026-11-06
