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As a major element of the Financial Sector Reforms in India, RBI introduced

prudential norms for banking regulation. Capital adequacy, exposure ceilings for
lending to individual and group of borrowers, marking to market of the investment
portfolio and, income recognition, asset classification and provisioning norms for
the loan portfolio (IRAC in short) formed the core of prudential regulation.
The IRAC norms serve two primary purposes - (i) to depict the true position of a
bank's loan portfolio
and (ii) to help arrest its deterioration. The Committee on Financial System (CFS),
under the Chairmanship of Shri M. Narasimham, recommended a policy of income
recognition and asset classification based on record of recovery and other objective
criteria as also provisioning based on the classification of assets into different
categories. RBI largely accepted the recommendations of the CFS and introduced
the IRAC norms.
2. Income recognition
(i) Effective from April 1, 1992, banks cannot consider as income interest on loan
accounts, classified as
Non-Performing Assets (NPA), unless actually received. Such unrealised interest
on NPA taken as income in the earlier year has to be provided for. In other words,
income from NPA is booked as incomemonly when actually received, and not on
accrual basis.
In respect of loan accounts, classified as performing assets, accrued interest can be
debited to the borrowers account and taken to income account. If the relevant
credit facility becomes NPA later, the bank should provide for the interest accrued

and credited to income account. In such cases, while making provision the amount
held in "Overdue Interest Reserve Account" should be deducted from the advances
(iv) Partial recovery of interest
Banks can take partial recovery of interest on NPA to their income account,
provided such recovery
is not out of fresh / additional credit facilities sanctioned to the borrowers
(v) Income recognition on investments classified as NPA
Investments also are subjected to prudential norms on income recognition. As such,
banks should not take to income interest on accrual basis in respect of any security
irrespective of the category in which it
is included, where interest / principal in respect of which is in arrears for more than
90 days.
Non-performing assets
A credit facility is considered non-performing when it ceases to generate income
for the bank. Earlier, an asset was classified as NPA if interest and / or instalment
of principal remained past due for a specific period.
(i) Term loan:
A term loan is to be classified as NPA if interest and / or principal remained
overdue for more than 90 days.
(ii) Cash credit and overdraft account:
A cash credit / overdraft account is classified as NPA if the account is out of order
for more than 90 days. An account is treated as out of order if the balance

outstanding is continuously in excess of the sanctioned limit or drawing power

(whichever is lower) or where the outstanding balance in the principal operating
account is within the sanctioned limit or drawing power, but there are no credits
continuously for 90 days as on the date of balance sheet, or credits made are not
enough to cover the interest debited during the same period.
(iii) Bills purchased and discounted:
A bill is treated as NPA, if it remains overdue and unpaid for a period of more than
90 days.
(iv) Other credit facilities:
Any other credit facility is to be treated as NPA, if it remains outstanding for a
period of more than 90 days.
(v) Agricultural advances:
In case of all direct agricultural advances, effective September 30, 2004 an account
should be treatedas NPA if interest and / or instalment of principal remained
overdue for two crop seasons from the due date for short duration crops and one
crop season from the due date for long duration crops. Long duration crops have a
crop season longer than one year and crops, which are not long duration crops are
treated as short duration crops. Depending upon the duration of crops raised by a
farmer, the above NPA norms would also be applied to agricultural term loan
availed of by him. The crop season for each crop, which means the period up to
harvesting, has to be decided by the State Level Bankers Committee in each state.
In respect of other activities like horticulture, floriculture or allied activities such as
animal husbandry, poultry farming etc., NPA classification would be done on 90
days impairment norm as in the case of other advances.

(a) Housing loans to staff members:

Housing loans or similar advances granted to staff members, where interest is
payable after recovery of principal should be classified as NPA only when there is
a default in payment of interest on due date.
(e) Advances affected by natural calamity
Where natural calamities impair the repaying capacity of the agricultural borrower,
UCBs may
consider i) converting the crop loan in to an agricultural term loan or rescheduling
the repayment period and ii) sanctioning fresh short-term loans. In such cases, the
term loan or the fresh short-term loan will be treated as current dues and need not
be classified as NPA. Asset classification of these loans will be governed by the
revised terms and conditions and these would be classified as NPA.
Asset Classification
In order to facilitate assessment of quality of the advances portfolio and to enable
them to make
adequate provisions.Banks have classified loan assets into the following categories
Guidelines for asset classification
Assets are to be classified generally on the basis of well-defined credit weaknesses
and the extent ofdependence on collaterals for realisation of dues. Net worth of
borrower / guarantor should not be taken into account while determining whether
an advance is NPA. Banks should bear in mind the following RBI guidelines for
asset classification.
(i) Identification of assets as NPA on on-going basis

Banks should identify assets as NPA on an on-going basis. They should evolve a
system to eliminate the tendency to delay or postpone identification of NPA,
particularly in respect of high-value accounts. They should internally resolve
doubts regarding asset classification within one month of the date by which the
account would have been classified as NPA as per prescribed norms.
a) Record of recovery
The classification of an asset as NPA has to be done on the record of recovery.
Banks should not
classify an account as non-performing due to the existence of temporary
deficiencies such as balance exceeding limit, non-availability of adequate drawing
power, non-submission of stock statement or non-renewal of accounts on due date.
If an account is
regularised before the balance sheet date by repayment of overdue through genuine
sources (not by sanction of additional facilities or transfer of funds between
accounts), the account need not be treated as NPA.
(iii) Potential threats to recovery
In respect of accounts where there are potential threats to recovery on account of
erosion in the value of security or existence of factors such as frauds committed by
borrowers, such accounts should be straightway classified as doubtful or loss asset,
as the case may be, irrespective of the period for which they have remained as
(v) Classification as NPA for non-review or non-renewal of limits
An account where regular / ad-hoc credit limits are not reviewed or not renewed
within 90 days from the due date or date of ad-hoc sanction will be classified as

(vi) Treatment of loss assets

If the realizable value of the security, as assessed by the bank or approved valuer or
RBI, is less than 10% of the outstanding in the borrowers account, existence of
security should be ignored and the account should be classified straightway as a
loss asset.
(viii) Fixing realistic repayment schedules
CBs should fix monthly / quarterly instalments for repayment of gold loans for
purposes after taking in to account the income generation pattern and repayment
capacity of the
borrower. Such gold loans should be classified as NPA if interest and / or
instalment remain overdue for more than 90 days. In case of gold loans for
agricultural purpose, interest has to be charged at yearly intervals as per the
Supreme Court judgement and payment should coincide with harvesting. Such
advances will be NPA only if instalment and / or interest become overdue after the
due date.