Corporate Accounting and Auditing · Accounts of Banking, Electricity and Insurance Companies

Income Recognition and Asset Classification (NPA) for Banks

Updated 10 October 2026 · Fact-checked

An NPA is a loan or advance whose interest or instalment stays overdue for more than 90 days. Banks classify advances as standard, sub-standard, doubtful or loss, apply a fixed provision percentage to each, and stop recognising interest on NPAs until it is actually received. To solve a problem: classify, split secured and unsecured, then multiply.

Understand Income Recognition and Asset Classification (NPA)

A bank earns mostly from interest on advances. If a borrower stops paying, the interest the bank has booked may never come in. RBI's prudential norms stop banks from showing such income as profit and force them to set aside provisions for likely losses. Under the Banking Regulation Act, 1949, RBI can determine the advances policy that banks must follow (section 21). The detailed NPA norms come from RBI's prudential circulars, not from the Act's text.

A Non-Performing Asset (NPA) is an advance where interest or an instalment of principal remains overdue for more than 90 days. Other triggers also exist, for example a cash credit or overdraft account that is 'out of order', or a bill purchased or discounted that stays overdue for more than 90 days. Agricultural loans follow crop-season rules. Everything else is a standard asset.

NPAs are split into three classes by age and recoverability:

Sub-standard asset: an NPA for a period not exceeding 12 months.
Doubtful asset: an asset that has stayed sub-standard for 12 months. The 'doubtful' period is then counted as up to 1 year, 1 to 3 years, and more than 3 years.
Loss asset: an asset the bank, its auditors or RBI has identified as uncollectable, though not yet written off in full.

Provision rates depend on the class and on whether the dues are covered by security. For sub-standard assets the general rate is 15% on the outstanding, with an additional 10% on the unsecured part (so 25% on unsecured). Doubtful assets carry 100% on the unsecured part, and on the secured part 25%, 40% or 100% depending on how long the asset has been doubtful. A loss asset needs 100%. A standard asset carries a small general provision. In exam questions, use the standard-asset rate given in the question. If none is given, 0.40% is the usual rate for general advances.

Income recognition: interest on an NPA is not taken to profit and loss as it accrues. It is recognised only when actually received. When an account turns NPA, interest accrued earlier but not collected is reversed. Related to this, the discount on bills discounted is income only for the period elapsed. The unexpired part at year-end is carried as rebate on bills discounted under other liabilities.

Key rules to remember

NPA test: Overdue > 90 days → NPA; Applies to interest or instalment overdue on term loans, and to bills overdue. Cash credit or overdraft accounts that are out of order are also NPAs.
Sub-standard asset: NPA for ≤ 12 months; Provision: 15% of total outstanding. Add 10% on the unsecured exposure, which makes 25% on the unsecured part.
Doubtful asset – secured portion: Up to 1 year: 25% | 1 to 3 years: 40% | More than 3 years: 100%; Applied to the realisable value of the security. Period is how long the asset has been doubtful.
Doubtful asset – unsecured portion: Unsecured portion = Outstanding − Realisable value of security; Provision = 100%; Always 100% on the part not covered by security, whatever the age.
Loss asset: Provision = 100% of outstanding; Applies to the balance not yet written off.
Standard asset: General provision = Rate × Standard advances; Use the rate stated in the question. 0.40% is the common rate for general advances. Rates differ for some sectors.
Interest on NPA: Recognised on receipt basis only; Reverse interest accrued but uncollected when the account becomes NPA.
Income from bills discounted: Income = Discount received + Opening rebate − Closing rebate; Closing rebate = Unexpired discount on bills at the year-end. It appears under other liabilities.

How to solve Income Recognition and Asset Classification (NPA) questions

Use this order for any NPA classification and provisioning question. It keeps the working clean so you earn step marks even if one figure is wrong.

1List every advance in a table with its outstanding amount, security value and the period it has been overdue or non-performing.
2Classify each advance as standard, sub-standard, doubtful or loss using the 90-day test and the age since it became NPA.
3For sub-standard and doubtful assets, split the outstanding into secured part (realisable value of security) and unsecured part.
4Apply the provision rate to each part as per the norms. For doubtful assets, pick the secured-part rate by how long the asset has been doubtful.
5Compute the provision on each line and write the amounts in a column. Add them for total provision required.
6If the question gives existing provision, find the charge to profit and loss as required provision minus existing provision.
7For income, reverse or exclude interest on NPAs not yet received. For bills discounted, adjust for the opening and closing rebate.
8State the final figure clearly and note where it appears in the bank's final accounts: provisions in the profit and loss account, net advances in the balance sheet.

Quickest way: Table and percentage method

When to use it: Use this in MCQs and in numerical questions where the advances are already described by age and security.

Draw four columns: Class, Secured part, Unsecured part, Provision.
Write the percentage beside each class before calculating: standard at the given rate, sub-standard 15% (25% on unsecured), doubtful 25/40/100% on secured and 100% on unsecured, loss 100%.
Compute unsecured as outstanding minus security value, never the other way round.
Total the provisions in one go and check that no class has been missed.
For rebate questions, compute closing rebate bill by bill, then use Discount received + Opening rebate − Closing rebate.

Common mistakes in Income Recognition and Asset Classification (NPA)

Applying the doubtful asset percentage to the full outstanding instead of splitting it into secured and unsecured parts.
Students remember '40%' but forget that the rate applies only to the secured part, and the unsecured part is always 100%.
Fix: Always split first. Secured = realisable value of security. Unsecured = outstanding − that value. Then apply separate rates.
Taking the sub-standard rate as 25% on the whole outstanding.
Students merge the 15% base rate with the extra 10% for unsecured exposure.
Fix: Use 15% on the total outstanding, then add 10% on the unsecured part only. For a fully secured loan it stays at 15%.
Treating accrued but unpaid interest on an NPA as income.
Students follow the normal accrual principle used in other companies.
Fix: For NPAs, income is recognised only when received. Reverse any interest that was accrued but not collected when the account became NPA.
Classifying an asset as doubtful after 90 days overdue.
Students confuse the 90-day trigger for NPA with the 12-month period for doubtful.
Fix: After 90 days overdue it becomes an NPA, first sub-standard. It becomes doubtful only after 12 months as sub-standard.
Showing the full discount received on bills discounted as income for the year.
Students forget the discount covers a period that may extend beyond the year-end.
Fix: Add the opening rebate and deduct the closing rebate. Show the closing rebate as a liability.
Charging the full required provision to profit and loss when an existing provision is given.
Students skip the last line of the question.
Fix: Charge only required provision minus existing provision. If existing is higher, the difference is written back.

Worked examples

Example 1

A bank has the following advances at the year-end. Standard advances ₹50,00,000 (general provision 0.40%). Sub-standard: fully secured ₹10,00,000 and an unsecured advance of ₹4,00,000. Doubtful (doubtful for 2 years): outstanding ₹8,00,000 with realisable security of ₹5,00,000. Loss assets not written off: ₹2,00,000. Calculate the total provision required.

Show the solution

Standard assets: 0.40% × ₹50,00,000 = ₹20,000.
Sub-standard, fully secured: 15% × ₹10,00,000 = ₹1,50,000.
Sub-standard, unsecured: 25% × ₹4,00,000 = ₹1,00,000 (15% base plus 10% additional).
Doubtful, secured part: realisable value ₹5,00,000. Doubtful for 2 years falls in the 1 to 3 years band, so 40% × ₹5,00,000 = ₹2,00,000.
Doubtful, unsecured part: ₹8,00,000 − ₹5,00,000 = ₹3,00,000 at 100% = ₹3,00,000.
Loss assets: 100% × ₹2,00,000 = ₹2,00,000.
Total = ₹20,000 + ₹1,50,000 + ₹1,00,000 + ₹2,00,000 + ₹3,00,000 + ₹2,00,000 = ₹9,70,000.

Answer: Total provision required is ₹9,70,000.

Example 2

For a bank, the following are given for the year. Discount received on bills discounted during the year ₹1,15,000. Rebate on bills discounted at the beginning of the year ₹9,000. At the year-end there are two discounted bills with unexpired periods: Bill A ₹4,00,000 discounted at 12% p.a., 45 days unexpired; Bill B ₹6,00,000 discounted at 10% p.a., 72 days unexpired. Take a year as 360 days. Find the income from discount to be credited to profit and loss and the closing rebate.

Show the solution

Rebate on Bill A = ₹4,00,000 × 12% × 45 ÷ 360 = ₹6,000.
Rebate on Bill B = ₹6,00,000 × 10% × 72 ÷ 360 = ₹12,000.
Closing rebate on bills discounted = ₹6,000 + ₹12,000 = ₹18,000.
Income from discount = Discount received + Opening rebate − Closing rebate.
Income = ₹1,15,000 + ₹9,000 − ₹18,000 = ₹1,06,000.
The closing rebate of ₹18,000 is shown under other liabilities in the balance sheet.

Answer: Income from discount credited to profit and loss is ₹1,06,000, and the closing rebate on bills discounted is ₹18,000.

Exam tips

In MCQs, read the exact word: 'secured' versus 'unsecured', and how long the asset has been doubtful. Most wrong options use the wrong band.
Always show the secured and unsecured split in written answers. Examiners award separate marks for each line.
If the question gives a standard-asset provision rate, use it. If it does not, state the rate you assume.
For rebate on bills discounted, show the closing rebate calculation bill by bill, then the income formula, so partial marks are protected.
Link the answer to the final accounts: provisions go to profit and loss, net advances to the balance sheet, rebate to other liabilities.

Practice questions from Accounts of Banking, Electricity and Insurance Companies

Income Recognition and Asset Classification (NPA) in other exams

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

Income Recognition and Asset Classification (NPA): frequently asked questions

What is the difference between sub-standard and doubtful assets?

A sub-standard asset is an NPA for a period not exceeding 12 months. A doubtful asset is one that has remained sub-standard for 12 months. Doubtful assets carry higher provisions, with 100% on the unsecured part.

How do I calculate provision for NPA in bank accounts?

Classify each advance, then split it into secured and unsecured parts where needed. Apply the percentage for that class to each part and add them up. If the question gives an existing provision, charge only the difference to profit and loss.

When does an account become an NPA?

A term loan becomes an NPA when interest or an instalment of principal is overdue for more than 90 days. A bill purchased or discounted also becomes an NPA if overdue for more than 90 days. A cash credit or overdraft account that is out of order is also an NPA.

How is interest on an NPA treated?

Interest on an NPA is not taken to income as it accrues. It is recognised only when actually received. Interest accrued earlier but not collected is reversed when the account turns NPA.

What is rebate on bills discounted?

It is the part of discount that relates to the period after the year-end. It is not yet earned, so it is carried forward as a liability under other liabilities. Income for the year is discount received plus opening rebate minus closing rebate.