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Economics April 27, 2026 4 min read Daily brief · #13 of 32

Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Repeal Directions, 2026

The Reserve Bank of India formally repealed the "RBI (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025" with ef...

GS Paper 3 (Indian Economy — Banking Sector)

What Happened

  • The Reserve Bank of India formally repealed the "RBI (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025" with effect from April 1, 2027.
  • The repeal makes way for the new "RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026," which is rooted in the Expected Credit Loss (ECL) approach.
  • The notification (RBI/DOR/2026-27/36, dated April 27, 2026) was issued under the authority of the Chief General Manager, Department of Regulation.
  • Transition safeguards are built in: rights, liabilities, and pending proceedings under the old framework remain legally valid and can continue as if the old directions were still in force.
  • The legal continuity clause prevents disruption to ongoing enforcement actions or approvals already granted under the IRAC framework.

Static Topic Bridges

What Was the IRAC Framework?

The Income Recognition, Asset Classification and Provisioning (IRAC) norms were first introduced in India in 1993, following the recommendations of the Committee on Financial System chaired by M. Narasimham. They operationalised prudential banking regulation in India for over three decades.

Under IRAC, banks were required to: 1. Recognise income only on a cash basis for non-performing assets (NPAs) — no accrual of interest on doubtful loans. 2. Classify assets into four buckets: Standard, Sub-standard, Doubtful, and Loss — based on overdue periods (primarily the 90-day rule for NPAs). 3. Provision for losses based on the incurred loss model — provisioning was triggered only after a loss event had already occurred.

The IRAC framework was periodically consolidated and updated through Master Circulars, most recently consolidated in the 2025 Directions (issued November 28, 2025).

  • The 90-day overdue criterion for NPA classification was introduced in 2004 (moved from 180 days), aligning with international standards.
  • Asset classification cascade: Sub-standard (up to 12 months NPA) → Doubtful (beyond 12 months) → Loss (where recovery is unlikely).
  • Provisioning requirements escalate steeply: Standard assets require 0.25–1%, while Loss assets require 100% provisioning.
  • Income on NPAs is de-recognised and reversed, preventing banks from booking phantom profits.

Connection to this news: The repeal of the IRAC Directions marks the formal legislative sunset of India's incurred-loss framework. The new ECL directions replace it, though the 90-day NPA rule is retained as a prudential floor.

The Incurred Loss vs. Expected Credit Loss Paradigm

The fundamental conceptual shift at the heart of this transition:

Dimension IRAC (Incurred Loss) ECL (Expected Credit Loss)
When is loss recognised? After a loss event occurs (reactive) From the moment a loan is originated (proactive)
Provisioning trigger Loan becomes overdue/NPA Forward-looking probability of default
Criticism Procyclical — amplifies downturns Counter-cyclical — builds buffers in good times
Global standard Old approach (IAS 39) IFRS 9 standard (effective globally from 2018)

The incurred loss model was criticised for contributing to the global financial crisis of 2008 — banks held insufficient provisions heading into the downturn because losses had not yet been "incurred" by accounting standards.

  • The International Accounting Standards Board (IASB) replaced IAS 39 with IFRS 9, mandating ECL provisioning for all financial instruments from January 1, 2018.
  • India's commercial banks are not yet under IFRS (Indian AS for banks has been deferred multiple times); this RBI direction is a separate, parallel adoption of the ECL logic within the existing Indian accounting framework.
  • The RBI released a Discussion Paper on ECL in January 2023, followed by an external working group under R. Narayanaswamy (former IIM Bangalore professor), and draft directions in 2025 before finalising in April 2026.

Connection to this news: The repeal of IRAC and the issuance of new ECL-based directions complete a four-year consultative transition process that began with the January 2023 discussion paper.

RBI's Regulatory Authority for Prudential Norms

The RBI issues prudential norms under powers conferred by: - Section 21 and Section 35A of the Banking Regulation Act, 1949 — enabling the RBI to issue binding directions to banks on loans, advances, and related matters. - Section 56 of the Banking Regulation Act applies these powers to cooperative banks with modifications.

  • The RBI's DOR (Department of Regulation) is the nodal department for issuing such prudential directions.
  • Directions issued under Banking Regulation Act have statutory force — non-compliance attracts penalties under Section 46 of the Act.
  • The "savings clause" in the repeal notification (protecting ongoing proceedings) is standard legislative drafting practice drawn from the General Clauses Act, 1897, principle that a repeal does not extinguish vested rights.

Connection to this news: The repeal notification cites RBI's statutory powers and explicitly invokes transition provisions to ensure legal continuity — a point relevant for understanding how regulatory change is managed in India's banking sector.

Key Facts & Data

  • Framework repealed: RBI (Commercial Banks – IRAC) Directions, 2025 (issued November 28, 2025)
  • Effective date of repeal: April 1, 2027
  • Replacing framework: RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026
  • Notification reference: RBI/DOR/2026-27/36, dated April 27, 2026
  • IRAC origin year: 1993 (Narasimham Committee recommendations)
  • Global ECL adoption: IFRS 9 effective January 1, 2018 (for most jurisdictions)
  • India ECL discussion paper: Released January 16, 2023
  • NPA rule retained: 90-day overdue criterion continues under the new framework
  • Transition protection: All prior approvals, liabilities, and enforcement actions under IRAC remain valid
On this page
  1. What Happened
  2. Static Topic Bridges
  3. What Was the IRAC Framework?
  4. The Incurred Loss vs. Expected Credit Loss Paradigm
  5. RBI's Regulatory Authority for Prudential Norms
  6. Key Facts & Data
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