Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

Income Recognition and Asset Classification (IRAC) Norms for Banks

Updated 11 October 2026 · Fact-checked

IRAC norms are RBI rules that decide when a bank may book interest as income and how it must label each loan. Loans are standard or non-performing (NPA). NPAs are sub-standard, doubtful or loss assets. Each class needs a minimum provision. You solve questions by finding overdue days, class, income treatment and provision.

Understand Income Recognition and Asset Classification

A bank lends money and earns interest. But if the borrower stops paying, that interest is not real income. The bank cannot pay its depositors or shareholders out of money it has not received. IRAC norms stop banks from showing such unpaid interest as profit and force them to admit bad loans early.

The RBI issues these norms as prudential rules for banks. They have two parts. Income recognition says when interest can be taken to the profit and loss account. Asset classification says how to group each loan by its repayment record. Provisioning then says how much of the profit must be set aside against each group.

The key idea is the non-performing asset (NPA). A loan becomes an NPA when interest or principal stays overdue for more than 90 days. This is the 90-days overdue norm. Loans that are not NPAs are standard assets. Under the RBI's income recognition norm, interest on an NPA is booked only when it is actually received, that is, on a cash basis. Interest on standard assets is booked on an accrual basis.

NPAs are then graded by how long they stay bad and how much recovery is likely. A sub-standard asset is an NPA for up to 12 months. A doubtful asset has stayed sub-standard for 12 months. A loss asset is one the bank, its auditors or the RBI inspectors have identified as uncollectable, though it may not be fully written off.

The classification is made borrower-wise, not facility-wise, in general. This means if one loan of a borrower turns bad, the other loans of the same borrower are generally classified the same way. Check the latest RBI Master Circular on IRAC norms for the exact wording and any recent changes, because the circular is what the examiner expects you to apply.

Key rules to remember

NPA test (term loans): Interest or instalment of principal overdue for more than 90 days → NPA; The count is of days overdue. Exactly 90 days is not yet an NPA; the account must be overdue for more than 90 days.
Sub-standard asset: NPA for a period not exceeding 12 months; Starts from the date the account became an NPA.
Doubtful asset: Asset that has remained sub-standard for 12 months; Provision rises with the age of the doubtful status (up to one year, one to three years, more than three years).
Loss asset: Asset identified as uncollectable by the bank, internal or external auditors or RBI inspection, but not written off in full; Needs 100% provision of the outstanding.
Income recognition: Standard asset: accrual basis. NPA: cash basis (income only when actually received); Interest already booked but unrealised on an account turning NPA must be reversed.
Provision on standard assets (general rule): 0.40% of outstanding is the general rate for standard assets. Direct agriculture and SME: 0.25%. Commercial real estate: 1%. Commercial real estate - residential housing: 0.75%; These are the main rates only. Other categories of standard assets carry different rates, so check the latest RBI Master Circular. Quote the rate given in the question.
Provision on sub-standard assets: 15% of the secured portion; 25% of the unsecured portion (ab initio). Infrastructure loan accounts with the specified escrow structure carry a lower rate of 20% on the unsecured portion; The general provision is 15% of the total outstanding, with an additional 10% on the unsecured exposure, which gives 25% on that part. Split the outstanding into secured and unsecured parts and apply each rate to its own part. Use the rate stated in the question if it differs.
Provision on doubtful assets: Secured part: 25% up to 1 year, 40% for 1 to 3 years, 100% above 3 years. Unsecured part: 100%; Total provision is the secured-portion provision plus 100% of the unsecured portion.
Provision on loss assets: 100% of outstanding; Even if the asset is not yet written off.

How to solve Income Recognition and Asset Classification questions

Use this order for any numerical or descriptive question on IRAC. It keeps your answer in the provision, analysis, conclusion shape that examiners reward.

1Note the facts: loan type, outstanding, date of last payment, overdue period, security value and the date on which the position is being tested.
2Count the days overdue and apply the 90-day test. If it is 90 days or less, the asset stays standard.
3If it is an NPA, work out how long it has been an NPA and place it as sub-standard, doubtful or loss using the 12-month rule and any loss identification.
4Decide the income treatment: reverse unrealised interest, stop accruing, and book only cash received.
5Split the outstanding into secured and unsecured parts if the question gives security value. Apply the correct rate to each part.
6Add the provisions and state the total. Show each line of working so marks are awarded even if one figure slips.
7Write the conclusion in one line: the classification, the income position and the provision required. Add a short compliance point if asked.

Quickest way: Four-line IRAC check

When to use it: Use when a question gives you a loan with an overdue period and asks for classification and provision in a few minutes.

Line 1: Days overdue more than 90? If no, standard asset, general provision only.
Line 2: If yes, NPA for how long? Up to 12 months is sub-standard. Beyond that is doubtful. Uncollectable is loss.
Line 3: Secured value versus outstanding. Doubtful: provide on the secured part at the age-based rate (25%, 40% or 100%) and 100% on the unsecured portion. Loss: 100% of outstanding. Sub-standard: 15% on secured, 25% on unsecured.
Line 4: Write: class, income stopped, total provision. Done.

Common mistakes in Income Recognition and Asset Classification

Treating an account as an NPA at exactly 90 days overdue.
Students remember the number 90 and ignore the words 'more than'.
Fix: Write 'more than 90 days' in your answer. Day 91 onwards is NPA.
Booking interest on an NPA on accrual basis.
Students carry over normal accrual accounting from financial accounting.
Fix: Remember the two-line rule: standard on accrual, NPA on cash. Also reverse interest already booked but unrealised.
Applying the doubtful asset provision to the whole outstanding at one rate.
Students forget the secured and unsecured split.
Fix: Always split. Unsecured part gets 100%. Secured part gets the rate by age of doubtful status.
Counting the 12 months for doubtful status from the loan date instead of the NPA date.
Loan age and NPA age get mixed up.
Fix: Start the clock when the account first became an NPA, not when the loan was sanctioned.
Confusing a loss asset with a written-off asset.
The word 'loss' suggests the asset is gone from the books.
Fix: A loss asset may still be on the books. It needs 100% provision until it is actually written off.
Classifying only the overdue facility as NPA when the same borrower has other loans.
Students look at one loan at a time.
Fix: Remember the borrower-wise approach: check the other facilities of the same borrower and mention it in your answer, subject to the circular's conditions.

Worked examples

Example 1

A bank has a term loan of ₹50,00,000 to a borrower. The instalment due on 31 January was not paid. On 30 June of the same year, the account is reviewed. Classify the account and state the income treatment. Assume all facts are as given and no payment was made after 31 January.

Show the solution

Days overdue from 31 January to 30 June: February 28, March 31, April 30, May 31, June 30, which is 150 days (taking a non-leap year).
150 days is more than 90 days, so the account is an NPA.
Days from 31 January to 30 April are 28 + 31 + 30 = 89, so 1 May is day 90. The account is overdue for exactly 90 days on 1 May, so it is still standard on that day. From 2 May (day 91) it is overdue for more than 90 days, so it becomes an NPA on 2 May. Banks recognise this status as part of the day-end process on that date. By 30 June it has been an NPA for about two months, which is within 12 months, so it is a sub-standard asset.
Income: stop accruing interest. Reverse any interest booked but not received. Book future interest only when actually received in cash.

Answer: The account is overdue for more than 90 days from 2 May and is recognised as an NPA in the day-end process on that date. It is classified as a sub-standard asset. Interest is recognised on cash basis only, and unrealised interest already booked is reversed.

Example 2

A bank holds a doubtful asset with outstanding of ₹40,00,000. It has been doubtful for 2 years. The realisable value of security is ₹30,00,000. Compute the provision required using: secured portion 40% for doubtful for 1 to 3 years, unsecured portion 100%.

Show the solution

Secured portion = ₹30,00,000 (security value, which is lower than outstanding).
Unsecured portion = ₹40,00,000 − ₹30,00,000 = ₹10,00,000.
Provision on secured portion = 40% × ₹30,00,000 = ₹12,00,000.
Provision on unsecured portion = 100% × ₹10,00,000 = ₹10,00,000.
Total provision = ₹12,00,000 + ₹10,00,000 = ₹22,00,000.

Answer: The bank must hold a provision of ₹22,00,000.

Exam tips

Write the rule first, then the facts, then the conclusion. Case-based answers earn marks for this order.
Show every step of provisioning arithmetic. Marks go to method even if the final figure is off.
State the rate you use and say it is as per the RBI norms or as given in the question. Rates can change, so use the figure in the question when one is supplied.
Draw a small timeline for overdue days and NPA age. It prevents counting mistakes.
Add one line on income recognition in every answer. Examiners often expect both asset class and income treatment.

Practice questions from Analysis of Financial Statements of Banks

Income Recognition and Asset Classification 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: frequently asked questions

What is an NPA in banking?

An NPA is a loan on which interest or an instalment of principal remains overdue for more than 90 days. Once a loan is an NPA, the bank stops booking interest on accrual basis and must hold provisions against it.

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

A sub-standard asset has been an NPA for up to 12 months. A doubtful asset has stayed sub-standard for 12 months. A loss asset is one identified as uncollectable by the bank, auditors or RBI inspectors, though not necessarily written off.

How is income recognised on an NPA?

Interest on an NPA is recognised only when it is actually received. Interest already booked but not collected when the account turns NPA is reversed. Standard assets continue on accrual basis.

Do I need to memorise provisioning percentages for the exam?

Learn the main rates for sub-standard, doubtful and loss assets, as they are the base of most answers. If a question gives a different rate, use the rate given. Check the latest RBI Master Circular for any change.