RBI issues Directions on Asset Classification, Provisioning, and Income Recognition for Commercial Banks

The Reserve Bank of India issued final Directions on Asset Classification, Provisioning, and Income Recognition for commercial banks on April 27, 2026, effec...

What Happened

The Reserve Bank of India issued final Directions on Asset Classification, Provisioning, and Income Recognition for commercial banks on April 27, 2026, effective April 1, 2027.
The Directions consolidate and update India's Income Recognition, Asset Classification, and Provisioning (IRAC) norms — the foundational ruleset governing how banks classify loans and set aside capital reserves against bad debt.
The final version incorporates feedback received during stakeholder consultation on an October 2025 draft, with an explanatory annex detailing how public inputs were addressed.
The RBI simultaneously issued 13 amendment Directions covering stressed asset resolution, concentration risk, investment portfolio norms, credit risk management, credit card guidelines, Asset-Liability Management (ALM), credit facilities, Non-Operative Financial Holding Companies (NOFHCs), financial statement disclosures, and wilful defaulter treatment.
One Repeal Direction was issued to formally supersede all previous IRAC master circulars and directions, creating a single consolidated regulatory document.
Separate guidance for All India Financial Institutions (AIFIs) will be issued in due course.

Static Topic Bridges

IRAC Norms — Income Recognition, Asset Classification, and Provisioning

IRAC norms are the cornerstone of prudential banking regulation in India, determining when a bank must stop recognising income from a loan (income recognition), classify it as non-performing (asset classification), and set aside mandatory reserves (provisioning). They derive from the RBI's regulatory powers under Section 21 and Section 35A of the Banking Regulation Act, 1949, as well as Section 45JA of the RBI Act, 1934.

NPA definition: A loan becomes a Non-Performing Asset (NPA) when interest or principal repayment is overdue for more than 90 days (for term loans) or the account is "out of order" for over 90 days (for overdraft/cash credit).
Asset classification categories:
Standard: Regular performing loans.
Sub-standard: NPA for up to 12 months.
Doubtful: NPA in sub-standard category for over 12 months (Doubtful 1, 2, 3 by duration).
Loss: Identified as uncollectable; written off or fully provided.
Provisioning rates: Substandard secured: 15%; substandard unsecured: 25%; Doubtful I (1 yr): 25%; Doubtful II (2 yrs): 40%; Doubtful III (>3 yrs): 100%; Loss assets: 100%.
Income on NPA accounts must not be recognised on accrual basis; only actual cash receipt counts.

Connection to this news: The new consolidated Directions supersede years of piecemeal master circulars and amendments, providing a single authoritative document for IRAC compliance — reducing interpretive ambiguity and aligning with Basel III standards.

Stressed Asset Resolution Framework

The RBI's stressed asset framework governs how banks must identify, report, and resolve accounts showing early signs of financial stress — before they formally become NPAs. This is managed through mechanisms including the Special Mention Account (SMA) system, the Prudential Framework for Resolution of Stressed Assets (2019), and the Inter-Creditor Agreement (ICA) mechanism.

SMA sub-categories (days overdue): SMA-0 (principal/interest overdue 1–30 days), SMA-1 (31–60 days), SMA-2 (61–90 days). SMA classification triggers early warning and resolution planning.
Large borrower reporting: Accounts with aggregate exposure ≥ ₹5 crore to be reported to Central Repository of Information on Large Credits (CRILC).
Resolution timelines: For accounts in default with aggregate exposure ≥ ₹1,500 crore, resolution must be implemented within 180 days of the review period; after 180 days, additional provisions kick in.
IBC interplay: Banks may refer unresolved stressed accounts to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016.

Connection to this news: The 13 amendment Directions include updates to stressed asset resolution rules, refining timelines and inter-creditor coordination requirements under the consolidated framework.

Concentration Risk in Banking

Concentration risk arises when a bank's loan portfolio is over-exposed to a single borrower, sector, or geography. Excessive concentration amplifies systemic vulnerability during economic downturns in specific sectors.

Single borrower limit (SBL): A bank cannot lend more than 15% of its capital funds to a single borrower (20% for infrastructure projects).
Group borrower limit: 25% of capital funds for a borrower group (40% for infrastructure).
Sectoral concentration limits are also assessed under Pillar 2 (Supervisory Review) of Basel III.
The Large Exposures Framework (LEF), effective April 2019, limits a bank's exposure to any single counterparty at 25% of Tier 1 capital.

Connection to this news: The updated Directions include amendments to concentration risk norms, tightening thresholds or improving measurement methodology as part of the comprehensive IRAC overhaul.

Wilful Defaulters — Regulatory Framework

A wilful defaulter is a borrower who has the capacity to repay but deliberately avoids doing so, or who diverts/siphons funds contrary to the loan agreement. RBI guidelines on wilful defaulters restrict their access to institutional finance and impose reputational consequences.

Definition criteria (any one): (i) Default despite adequate funds; (ii) funds siphoned/diverted; (iii) assets created with credit disposed of; (iv) misrepresentation/falsification.
Consequences: Banks must not extend any additional credit to wilful defaulters; names published on CIBIL and Credit Information Companies; criminal prosecution recommended; promoters barred from accessing institutional finance for 5 years post settlement.
Large wilful defaulters (₹25 crore and above) are reported to CRILC.

Connection to this news: The amended Directions update the wilful defaulter treatment framework as part of the broader consolidation, potentially refining identification procedures, grievance mechanisms, or timelines for classification.

Key Facts & Data

Directions issued: April 27, 2026; Effective date: April 1, 2027.
NPA trigger: 90 days overdue for term loans.
SMA classification: SMA-0 (1–30 days), SMA-1 (31–60 days), SMA-2 (61–90 days).
Provisioning — Loss assets: 100% of outstanding.
Single borrower exposure limit: 15% of capital funds (20% for infrastructure).
Large Exposures Framework cap: 25% of Tier 1 capital.
Regulatory basis: Section 21 and Section 35A, Banking Regulation Act, 1949.
Wilful defaulter bar on fresh institutional credit: 5 years post settlement.
Draft released: October 2025; final after stakeholder feedback.
Number of amendment Directions issued simultaneously: 13.
Repeal Directions issued: 1 (superseding all prior IRAC master circulars).
Applicability: Commercial banks; AIFIs to receive separate guidance.