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Corporate Financial Reporting · NBFCs - Provisioning Norms, Accounting and Reporting

NBFC Provisioning Norms and How to Compute Provision

Updated 11 October 2026 · Fact-checked

NBFC provisioning norms are RBI rules on how much to set aside against each asset class. Classify each asset first. Provide a small percentage on standard assets, 10% on sub-standard, 100% of the unsecured part plus 20%, 30% or 50% of the secured part on doubtful, and 100% on loss assets. Then add the results.

Understand Provisioning Norms and Computation of Provision

An NBFC lends money, and some borrowers do not repay. If the NBFC shows every loan at full value, profit and net worth are overstated. Provisioning fixes this. The NBFC charges a part of the expected loss to the profit and loss account before the loss is certain.

RBI's prudential norms link the provision to the asset classification. The worse the asset, the higher the provision. Standard assets get a small general provision. Sub-standard assets get a flat percentage of the outstanding. Doubtful assets are split into a secured and an unsecured portion. Loss assets are provided in full.

The secured portion is the part of the outstanding covered by the realisable value of the security. The unsecured portion is the outstanding minus that realisable value. The unsecured portion is provided at 100%. The secured portion is provided at a rate that rises with the time the asset has stayed doubtful.

For lease and hire purchase assets, the same logic applies. The base is the net book value of the leased asset or the net outstanding on the hire purchase contract. The security is the realisable value of the underlying asset. Always use the rates and the base given in the question.

NBFCs that follow Ind AS compute impairment under the Ind AS 109 expected credit loss (ECL) model. They also compare it with the provision the RBI norms would require. If the ECL provision is lower, the shortfall is moved from profit to an Impairment Reserve. This reserve is not freely distributable. NBFCs that do not follow Ind AS apply the RBI norms directly.

Key rules to remember

Standard assets
Provision = 0.40% × outstanding standard assets
This is the general rate used in most study problems. Some categories of NBFCs or exposures carry a different rate. If the question gives a rate, use it.
Sub-standard assets
Provision = 10% × total outstanding
It is charged on the whole outstanding. Do not deduct security.
Doubtful assets: unsecured portion
Unsecured portion = Outstanding − Realisable value of security; Provision = 100% × unsecured portion
If the realisable value is more than the outstanding, the unsecured portion is nil. It is never negative.
Doubtful assets: secured portion
Secured portion × 20% (doubtful up to 1 year) | × 30% (1 to 3 years) | × 50% (more than 3 years)
The rate depends on how long the asset has been classified as doubtful, not on how long the loan has existed.
Loss assets
Provision = 100% × outstanding (if not already written off)
Provide only the balance not written off.
Total provision required
Total = Standard + Sub-standard + Doubtful (unsecured + secured) + Loss
Compute each class separately, then add.
Impairment reserve (Ind AS NBFCs)
Impairment reserve = RBI-norm provision − Ind AS 109 ECL provision (only if positive)
The reserve is created by appropriation from profit. Nothing is created if ECL is equal to or more than the RBI-norm figure.

How to solve Provisioning Norms and Computation of Provision questions

Use the same sequence for every provisioning problem. It keeps the workings clean and gets you step marks.

  1. 1Read the question and note the type of NBFC. Check whether it follows Ind AS. Check any special rate given.
  2. 2Classify every asset as standard, sub-standard, doubtful or loss. Use the facts given: overdue period, time in doubtful class, and any statement that the asset is irrecoverable.
  3. 3For standard and sub-standard assets, apply the percentage on the full outstanding.
  4. 4For each doubtful asset, find the realisable value of security. Compute the unsecured portion as outstanding minus realisable value, and provide 100% on it.
  5. 5Apply the 20%, 30% or 50% rate to the secured portion, depending on the time in the doubtful class. Cap the secured portion at the outstanding.
  6. 6For loss assets, provide 100% of the balance not yet written off. For lease and hire purchase assets, take net book value or net outstanding as the base.
  7. 7Add up the provisions in a neat table. Compare with the provision already in the books and show the additional charge or write-back.
  8. 8If the NBFC follows Ind AS, compare with the ECL provision and compute the impairment reserve.

Quickest way: Table method for provisioning

When to use it: Use it when a question has several assets and you have limited time.

  1. Draw four rows: standard, sub-standard, doubtful, loss. Add columns: outstanding, security, unsecured, secured, rate, provision.
  2. Fill the outstanding for each asset first. Then fill the realisable value of security for doubtful assets.
  3. Compute unsecured as outstanding minus security. Mark that amount at 100%.
  4. Multiply the secured amount by 20%, 30% or 50%. Write the period next to it so you do not pick the wrong rate.
  5. Total the last column once. Cross-check by adding the unsecured and secured provisions separately.

Common mistakes in Provisioning Norms and Computation of Provision

  • Applying 100% to the whole doubtful asset

    You remember that doubtful is a high-provision class and ignore the secured portion.

    Fix: Always split the outstanding into unsecured and secured portions. Only the unsecured portion takes 100%.

  • Using the wrong rate for the secured portion

    You count the age of the loan, not the time the asset has been doubtful.

    Fix: Use the doubtful period. Up to one year is 20%, one to three years is 30%, and over three years is 50%.

  • Deducting security from a sub-standard asset

    You carry the doubtful asset method over to every NPA.

    Fix: For sub-standard assets, provide 10% on the total outstanding. No split is needed.

  • Taking the market or book value of security instead of realisable value

    The question gives several values and you pick the biggest.

    Fix: Use only the realisable value. If it exceeds the outstanding, the unsecured portion is nil, not negative.

  • Forgetting the general provision on standard assets

    You focus on NPAs because they carry the larger amounts.

    Fix: Add the standard asset line to your table every time. Use the rate given or 0.40%.

  • Treating the ECL provision and the RBI-norm provision as additive for an Ind AS NBFC

    Both are called provisions, so they look like separate charges.

    Fix: The P&L carries the ECL provision. Only the shortfall against the RBI-norm figure is moved to the impairment reserve through appropriation.

Worked examples

Example 1

A non-Ind AS NBFC has these assets: standard assets ₹8,00,00,000; sub-standard assets ₹50,00,000; doubtful asset A of ₹20,00,000 with security realisable at ₹12,00,000, doubtful for 2 years; doubtful asset B of ₹10,00,000 with security realisable at ₹4,00,000, doubtful for 4 years; loss assets ₹3,00,000 not written off. Compute the total provision required. Use 0.40% for standard assets.

Show the solution
  1. Standard assets: 0.40% × ₹8,00,00,000 = ₹3,20,000.
  2. Sub-standard assets: 10% × ₹50,00,000 = ₹5,00,000.
  3. Asset A: unsecured portion = ₹20,00,000 − ₹12,00,000 = ₹8,00,000, provided at 100% = ₹8,00,000.
  4. Asset A: secured portion ₹12,00,000 at 30% (doubtful for 1 to 3 years) = ₹3,60,000. Total for A = ₹11,60,000.
  5. Asset B: unsecured portion = ₹10,00,000 − ₹4,00,000 = ₹6,00,000, provided at 100% = ₹6,00,000.
  6. Asset B: secured portion ₹4,00,000 at 50% (doubtful for over 3 years) = ₹2,00,000. Total for B = ₹8,00,000.
  7. Loss assets: 100% × ₹3,00,000 = ₹3,00,000.
  8. Total = 3,20,000 + 5,00,000 + 11,60,000 + 8,00,000 + 3,00,000 = ₹30,80,000.

Answer: Total provision required is ₹30,80,000.

Example 2

An Ind AS NBFC has one doubtful asset with an outstanding of ₹40,00,000. The security is realisable at ₹25,00,000. The asset has been doubtful for 18 months. The ECL provision on this asset in the books is ₹19,00,000. Compute the RBI-norm provision and the impairment reserve to be created.

Show the solution
  1. Unsecured portion = ₹40,00,000 − ₹25,00,000 = ₹15,00,000. Provision at 100% = ₹15,00,000.
  2. The asset has been doubtful for 18 months, which falls in the 1 to 3 year band. The rate on the secured portion is 30%.
  3. Secured portion provision = 30% × ₹25,00,000 = ₹7,50,000.
  4. RBI-norm provision = ₹15,00,000 + ₹7,50,000 = ₹22,50,000.
  5. ECL provision in the books = ₹19,00,000, which is lower than the RBI-norm provision.
  6. Impairment reserve = ₹22,50,000 − ₹19,00,000 = ₹3,50,000, appropriated from profit.

Answer: The RBI-norm provision is ₹22,50,000. An impairment reserve of ₹3,50,000 is created by appropriation from profit.

Exam tips

  • MCQs often test one rule: the secured portion rate for a given doubtful period, or the provision on sub-standard assets. Memorise the 10%, 20%, 30%, 50% and 100% pattern.
  • In written answers, show the unsecured and secured split as separate lines. Marks are given for each step, even if the final total is wrong.
  • Read the doubtful period carefully. Questions often give the loan age and the doubtful period as different numbers.
  • For Ind AS NBFC questions, finish by comparing ECL with the RBI-norm provision. Many students stop after computing one figure.
  • If the question gives a rate or base that differs from the one you remember, follow the question and state the assumption in a line.

Practice questions from NBFCs - Provisioning Norms, Accounting and Reporting

Provisioning Norms and Computation of Provision in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Provisioning Norms and Computation of Provision: frequently asked questions

What are the provisioning norms for NPAs in an NBFC?

Sub-standard assets need 10% of the outstanding. Doubtful assets need 100% of the unsecured portion plus 20%, 30% or 50% of the secured portion, depending on the doubtful period. Loss assets need 100% of the balance not written off. Standard assets carry a small general provision.

How do you calculate provision for a doubtful asset with secured and unsecured portions?

Subtract the realisable value of the security from the outstanding to get the unsecured portion. Provide 100% on it. Then apply 20%, 30% or 50% on the secured portion, based on how long the asset has been doubtful. Add the two amounts.

What is the difference between Ind AS 109 ECL and RBI provisioning for an NBFC?

ECL is a forward-looking model with stages based on credit risk. RBI norms are rule-based and follow the asset classification. An Ind AS NBFC books the ECL provision and, if it is lower than the RBI-norm figure, moves the shortfall to an impairment reserve from profit.

How are lease and hire purchase assets provided for?

The logic is the same as for loans. The base is the net book value of the leased asset or the net outstanding on the hire purchase contract. The security is the realisable value of the underlying asset. Use the rates and base stated in the question.