Banking and Insurance - Laws and Practice · Performing and Non Performing Assets

Income Recognition and Asset Classification (IRAC) Norms for CS Professional

Updated 11 October 2026 · Fact-checked

IRAC norms are RBI prudential rules. They stop a bank from booking income on an advance that is not being repaid, and they sort advances into standard, sub-standard, doubtful and loss assets. An advance becomes an NPA when interest or principal stays overdue for more than 90 days. You solve questions by finding the overdue date, then applying the time tests.

Understand Income Recognition and Asset Classification Norms

A bank earns interest on loans. But if the borrower stops paying, that interest is only a promise on paper. IRAC norms exist so that a bank's profit shows only income it can realistically collect. They also make sure the true quality of the loan book is visible.

Income recognition works on a simple idea: income from a performing asset is booked on accrual basis, but income from a non-performing asset (NPA) is booked only when it is actually received. Interest already accrued and booked on an account that turns NPA must be reversed, that is, taken out of income.

Asset classification puts every advance into one of four buckets. A standard asset is performing and carries no more than normal business risk. 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 RBI inspectors have identified as uncollectable, though it may not be fully written off.

The trigger for NPA is overdue status. A term loan is an NPA when interest or an instalment of principal remains overdue for more than 90 days. For cash credit and overdraft, an account is NPA if it stays out of order, for example the outstanding balance continuously exceeds the sanctioned limit or drawing power, for more than 90 days, or if there are no credits for 90 days to cover interest debited. Classification is borrower-wise in general, and an upgrade back to standard happens only after all arrears of interest and principal are cleared.

The RBI has issued these norms through master directions and circulars. Check the latest RBI text given in your study material for exact wording, because the Reserve Bank revises details from time to time.

Key rules to remember

NPA trigger: Interest or principal overdue for more than 90 days ⇒ NPA; Applies to term loans. For cash credit or overdraft, 'out of order' for more than 90 days is the test. The count is 'more than 90 days', so day 91 is the first NPA day.
Sub-standard asset: NPA for a period of up to 12 months ⇒ Sub-standard; The clock starts when the account first becomes NPA, not from the loan date.
Doubtful asset: Remained sub-standard for 12 months ⇒ Doubtful; Doubtful assets are usually sub-divided by how long they stay in this category: up to one year, one to three years, and more than three years. Provisioning rises with age.
Loss asset: Identified as uncollectable by bank, internal or external auditors or RBI inspection ⇒ Loss; Little or no value remains. It is not necessarily written off, but full provision is expected.
Income on NPA: Income on NPA = recognised only when actually received (cash basis); Accrued but unrealised interest of earlier periods is reversed or provided for when the account turns NPA.
Income on standard asset: Income on performing asset = recognised on accrual basis; Applies while the account remains standard.
Upgradation: NPA ⇒ Standard only when all arrears of interest and principal are paid by the borrower; Partial payment that still leaves the account overdue beyond 90 days does not upgrade it.

How to solve Income Recognition and Asset Classification Norms questions

Use the same sequence for any classification or income recognition question. It keeps you from missing the dates that decide the marks.

1Identify the type of facility: term loan, cash credit or overdraft, bill, agricultural advance. The 90-day test is applied differently for each.
2Find the due date of the first unpaid interest or instalment, or the date the account went out of order.
3Count the days to the reporting date (usually the balance sheet date). If the overdue period is 90 days or less, the account stays standard. If it is more than 90 days, it is an NPA.
4If it is an NPA, note the date it became NPA. Count the time since that date. Up to 12 months is sub-standard, beyond 12 months is doubtful.
5Check whether the facts say a loss has been identified by the bank, auditors or RBI. If so, classify it as a loss asset.
6Apply income recognition: stop accruing interest on the NPA, reverse unrealised interest booked earlier, and record income only on receipt.
7Check for upgradation: only full clearance of arrears moves the account back to standard.
8Write the conclusion in one line: provision, facts applied, classification, and the effect on income.

Quickest way: Date-and-bucket shortcut

When to use it: Use it for short-answer or case questions where you must classify an account in a couple of minutes.

Write the reporting date and the first overdue date.
Subtract to get overdue days. Compare with 90.
Not more than 90 days: standard, income on accrual. Stop here.
More than 90 days: NPA. Mark the date it turned NPA.
Up to 12 months since then: sub-standard. Over 12 months: doubtful.
Add one line: interest not received is not income, and earlier accrued interest is reversed.

Common mistakes in Income Recognition and Asset Classification Norms

Treating exactly 90 days overdue as NPA.
Students remember the figure '90 days' and forget the wording.
Fix: The test is overdue for more than 90 days. Day 90 is still standard and day 91 is NPA.
Counting the 12 months for doubtful from the date of loan sanction or disbursal.
The loan date is the easiest date in the question.
Fix: Count 12 months from the date the account became NPA. Sub-standard to doubtful is measured within the NPA period.
Continuing to book interest on an NPA because the borrower is still being charged.
Students confuse legal entitlement with income recognition.
Fix: Interest is charged to the account, but income is recognised only on receipt. Accrued interest is reversed on turning NPA.
Upgrading an account to standard after a part payment.
Students assume any payment cures the default.
Fix: Upgradation needs all arrears of interest and principal to be cleared. A small payment leaving the account overdue does not do it.
Applying the overdue test to cash credit like a term loan.
The same 90-day number is used for all advances.
Fix: For cash credit or overdraft, check whether the account is out of order: balance above limit or drawing power, or no credits covering interest, for more than 90 days.
Calling a loss asset a fully written-off asset.
The word 'loss' suggests it has left the books.
Fix: A loss asset is identified as uncollectable but may still sit in the books. It needs full provision, and write-off is a separate step.

Worked examples

Example 1

A bank sanctioned a term loan of ₹50,00,000 to Rao Textiles Ltd. An instalment of ₹2,00,000 fell due on 31 December and was not paid. Interest of ₹30,000 accrued for the following quarter was booked as income. On the next 31 March, the instalment is still unpaid. How should the bank classify the account on 31 March, and how should it treat the booked interest? (Assume a non-leap year, so January has 31, February 28 and March 31 days.)

Show the solution

Overdue date: 31 December. Count the days to 31 March. January 31 + February 28 + March 31 = 90 days.
The overdue period is exactly 90 days, which is not more than 90 days.
So the account is not yet an NPA on 31 March. It remains a standard asset.
Income stays on accrual basis, so the ₹30,000 booked interest need not be reversed on that date.
The account will turn NPA on 1 April if the instalment stays unpaid, because overdue days will then be 91.
If it turns NPA, the bank must reverse unrealised interest and book further income only on receipt.

Answer: On 31 March the overdue period is 90 days, not more than 90, so the account is a standard asset and the ₹30,000 interest stays as income. It becomes an NPA (sub-standard) from 1 April if unpaid, and then unrealised interest is reversed.

Example 2

A term loan to Mehta Foods Pvt. Ltd. became an NPA on 1 July 2026. On 30 September 2027 the account is still unpaid, and no loss has been identified. Interest of ₹1,20,000 for the period was debited to the account but not received. Classify the account and state the income treatment.

Show the solution

Date turned NPA: 1 July 2026. Date of assessment: 30 September 2027.
Time as NPA: 1 July 2026 to 30 June 2027 is 12 months, and a further 3 months run to 30 September 2027, so about 15 months.
Sub-standard covers NPA for up to 12 months. This account has been NPA for more than 12 months, so it is a doubtful asset.
No loss has been identified by the bank, auditors or RBI, so it is not a loss asset.
Income: the ₹1,20,000 interest was not received, so it cannot be recognised as income.
Any such interest already booked must be reversed. Future interest is booked only on receipt.

Answer: The account is a doubtful asset, as it has been NPA for about 15 months. The ₹1,20,000 unrealised interest is not income. It is reversed if booked, and income is recognised only when cash is received.

Exam tips

Write the day count in your answer. Examiners award marks for showing the 90-day test and the date arithmetic.
Use the structure provision, facts, conclusion. State the norm, apply the dates, then give a one-line classification.
Remember both halves of the topic. Many answers cover classification but forget the income recognition effect.
Quote the norm as 'more than 90 days', and mention that RBI revises circulars, so you rely on the current master direction in your material.
For long answers, add a short note on upgradation and loss asset identification to round out the answer.

Practice questions from Performing and Non Performing Assets

Income Recognition and Asset Classification Norms 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 Norms: frequently asked questions

When is an asset treated as NPA?

An advance is an NPA when interest or an instalment of principal stays overdue for more than 90 days. For cash credit or overdraft, it is an NPA when the account stays out of order for more than 90 days. Day 91 is the first NPA day.

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 remained sub-standard for 12 months. A loss asset is one identified as uncollectable by the bank, its auditors or RBI inspectors.

Can a bank book interest on an NPA?

No. Income on an NPA is recognised only when it is actually received. Interest booked earlier but not collected is reversed when the account turns NPA.

How does an NPA become a standard asset again?

The borrower must clear all arrears of interest and principal. A part payment that leaves the account overdue beyond 90 days does not upgrade it.