RBI tightens bad loan rules to align with global norms

The Reserve Bank of India issued revised Income Recognition, Asset Classification and Provisioning (IRAC) Directions for commercial banks, introducing a stri...

What Happened

The Reserve Bank of India issued revised Income Recognition, Asset Classification and Provisioning (IRAC) Directions for commercial banks, introducing a strict cross-default provision for non-performing asset (NPA) classification.
Under the new rule, if any one loan of a borrower with multiple credit facilities becomes an NPA, all other loans of that borrower are automatically classified as NPA — moving from facility-level to borrower-level classification.
The revision aligns India's prudential norms with the Basel Committee on Banking Supervision's Standardised Approach for credit risk, closing a long-standing gap between domestic practice and international standards.
Automated, system-driven day-end processes are now mandated for downgrading and upgrading asset classification, eliminating scope for manual intervention.
Large corporate borrowers with multiple loan accounts across the same bank face the most immediate impact, as a default on one facility will now trigger NPA classification across all their liabilities.

Static Topic Bridges

Non-Performing Assets (NPAs) and Asset Classification

An asset becomes non-performing when it ceases to generate income for the bank. The RBI classifies bank assets on a four-tier ladder based on the duration and nature of default:

Standard Asset: Performing, no default; banks maintain a general provision of 0.25%–1% depending on sector.
Sub-Standard Asset: NPA for up to 12 months; minimum 15% provision required.
Doubtful Asset: NPA for more than 12 months; provisioning ranges from 25% to 100% depending on collateral coverage.
Loss Asset: No recoverable value; 100% provisioning required; must be written off.
The trigger for NPA classification is a 90-day overdue rule — interest or principal unpaid for 90 days.

Connection to this news: The new cross-default provision does not change the 90-day trigger but expands its scope: once any one facility of a borrower crosses 90 days overdue, all other facilities of that borrower at the same bank are simultaneously downgraded to NPA.

Income Recognition and Asset Classification (IRAC) Norms

IRAC norms are RBI's master framework governing how banks recognise income from loans and classify assets on their balance sheets. First introduced in 1992 following the Narasimham Committee recommendations, they have been periodically tightened to reflect global best practices.

IRAC norms apply to all scheduled commercial banks regulated by the RBI (excluding Regional Rural Banks).
Income from NPA accounts cannot be recognised on accrual basis; it is booked only when actually received.
The November 2025 Master Directions consolidated all existing IRAC instructions up to that date into a unified, updated framework.
The April 2025 Master Circular (DOR.STR.REC.9/21.04.048/2025-26) extended and clarified these directions.

Connection to this news: The new cross-default rule is an amendment to the existing IRAC Directions, codifying the borrower-entity-level approach that was previously applicable to NBFCs but is now uniformly applied to commercial banks.

Basel III and Standardised Approach for Credit Risk

Basel III is the third iteration of the Basel Accords — a global regulatory framework developed by the Basel Committee on Banking Supervision (BCBS), hosted at the Bank for International Settlements (BIS), Basel, Switzerland. It was finalised following the 2008 global financial crisis to strengthen bank capital, liquidity, and risk management.

India adopted Basel III through RBI's Master Circular on Basel III Capital Regulations (2013), phased in over subsequent years.
India requires banks to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9%, compared to Basel III's global minimum of 8%.
Under the Standardised Approach for credit risk, risk weights are assigned to assets based on borrower category and external credit ratings.
Basel III's credit risk framework mandates cross-default treatment — a borrower in default on any obligation is treated as a credit-impaired entity across all facilities.
The Expected Credit Loss (ECL) framework, mandated by RBI to take effect from April 1, 2027, will further align provisioning with the IFRS 9 international accounting standard.

Connection to this news: The new RBI cross-default rule directly implements the Basel III principle that creditworthiness is assessed at the borrower entity level, not at individual facility level — ensuring India's banks now reflect borrower-wide credit risk accurately.

Provision Coverage Ratio (PCR)

PCR measures the proportion of a bank's NPAs for which it has set aside provisions, indicating its buffer against potential loan losses.

PCR = (Total Provisions held against NPAs / Gross NPAs) × 100.
RBI mandated a minimum PCR of 70% for banks in 2010; it is now a key supervisory metric.
Higher PCR signals greater resilience but reduces reported profitability in the short term.

Connection to this news: The cross-default rule is likely to increase Gross NPA figures for banks with large corporate borrowers who have multiple facilities. This would require additional provisioning, potentially compressing bank profitability in the near term, but strengthening systemic financial stability.

Key Facts & Data

90-day rule: A loan is classified as NPA if interest or principal remains overdue for more than 90 days (for term loans).
Four asset classes: Standard → Sub-Standard → Doubtful → Loss.
Provision rates: Sub-Standard: 15%; Doubtful (up to 1 year): 25%; Doubtful (1–3 years): 40%; Doubtful (>3 years): 100%; Loss: 100%.
CRAR requirement (India): 9% minimum vs. Basel III global minimum of 8%.
ECL framework effective date: April 1, 2027.
IRAC Master Circular reference: DOR.STR.REC.9/21.04.048/2025-26, dated April 1, 2025.
Cross-default scope: Applies to all credit facilities of a borrower with the same bank/NBFC; not cross-institutional.
Automation mandate: NPA downgrade and upgrade must occur via Straight Through Process (STP) without manual intervention.