NPA Management & IRAC Norms: CAIIB ABM Guide 2026
If there is one topic that decides whether you clear the Advanced Bank Management paper, it is NPA management. Asset quality questions appear in almost every CAIIB attempt, and examiners love testing whether you truly understand IRAC norms or have only memorised the headlines. This guide breaks down NPA classification, provisioning and recovery in plain language so you can score the easy marks with confidence.
Non-performing assets are not just an exam topic — they shape every lending decision you will make as a banker. Master NPA management here and you also build the foundation for risk, provisioning and recovery questions across other CAIIB papers.
What Is an NPA? The 90-Day Rule
An asset becomes a Non-Performing Asset (NPA) when it stops generating income for the bank. The core trigger is the 90-day overdue rule: if interest or principal on a term loan remains overdue for more than 90 days, the account turns NPA. For different facilities the test changes slightly:
- Term loan — interest/instalment overdue for more than 90 days.
- Cash credit/overdraft — account "out of order" for more than 90 days (outstanding above limit or no credits to cover interest).
- Bills purchased/discounted — bill overdue for more than 90 days.
- Agricultural advances — two crop seasons (short-duration) or one crop season (long-duration) overdue.
Remember that NPA recognition is borrower-wise, not facility-wise: if one account of a borrower is NPA, all facilities of that borrower are treated as NPA. Get this idea right and you will rarely lose marks on classification questions in practice tests.
IRAC Norms: The Four Asset Categories
The Income Recognition and Asset Classification (IRAC) framework sorts every advance into one of four buckets based on how long it has been impaired. This is the single most tested table in ABM, so commit it to memory:
| Category | Period as NPA | Meaning |
|---|---|---|
| Standard | Not overdue / within 90 days | Performing, no provision concern |
| Sub-standard | NPA up to 12 months | Credit weaknesses visible |
| Doubtful | NPA beyond 12 months | Recovery highly questionable |
| Loss | Identified as unrecoverable | Write-off due, little/no security value |
Income from an NPA must be booked only on actual receipt, not on accrual. Any interest already credited but not realised has to be reversed. This income-recognition discipline is exactly why asset quality hits a bank's profit so hard.
Provisioning Norms You Must Know
Once an account is classified, the bank must set aside a provision against expected loss. The percentages differ for secured and unsecured portions and rise as the asset ages:
- Standard assets — 0.25% to 1% depending on sector (higher for CRE and consumer loans).
- Sub-standard — 15% on secured; 25% on unsecured exposure.
- Doubtful (secured) — 25% up to 1 year, 40% for 1–3 years, 100% beyond 3 years.
- Doubtful (unsecured portion) — 100%.
- Loss assets — 100% provision or full write-off.
Numerical questions often give you the outstanding amount, security value and the NPA date, then ask for the provision. Practise these calculations — they are guaranteed marks. You can drill the categories quickly using the matching game before your exam.
Special Mention Accounts: Catching Stress Early
Before an account slips to NPA, the RBI requires banks to flag stress through Special Mention Accounts (SMA). This early-warning system gives you time to act:
- SMA-0 — overdue up to 30 days but showing stress signs.
- SMA-1 — overdue between 31 and 60 days.
- SMA-2 — overdue between 61 and 90 days.
SMA reporting feeds RBI's Central Repository of Information on Large Credits (CRILC), letting the system spot a borrower stressed across multiple banks. As a banker, SMA tracking is your first line of defence in NPA management — proactive follow-up at SMA-1 often prevents a full slippage.
Recovery Tools: SARFAESI, DRT and IBC
When an account turns bad, recovery shifts from persuasion to law. The three pillars you should know are:
- SARFAESI Act, 2002 — lets banks enforce security interest without court intervention (issue a 60-day notice, then take possession or sell the asset).
- Debt Recovery Tribunals (DRT) — fast-track forums for claims above the threshold limit.
- Insolvency and Bankruptcy Code, 2016 — time-bound resolution for corporate defaulters through the NCLT.
Banks also use compromise settlements, one-time settlements (OTS), Lok Adalats for small accounts, and sale to Asset Reconstruction Companies (ARCs). These recovery mechanisms overlap heavily with the Banking Regulations and Business Laws paper, so studying them once pays off twice.
Why NPA Management Matters for the Whole Bank
High NPAs erode profitability through provisions, lock up capital, and trigger the RBI's Prompt Corrective Action (PCA) framework when net NPA ratios cross set thresholds. Examiners may ask you to compute Gross NPA and Net NPA ratios:
- Gross NPA ratio = Gross NPAs ÷ Gross Advances.
- Net NPA ratio = (Gross NPAs − Provisions) ÷ Net Advances.
- Provision Coverage Ratio (PCR) = Total Provisions ÷ Gross NPAs.
A healthy PCR above 70% signals a well-cushioned bank. Keep an eye on current policy rates and norms via the RBI rates page, since provisioning and asset-quality rules evolve through RBI circulars. For the latest master directions, the RBI website is your authoritative source.
Smart Revision Strategy for the Exam
Do not try to memorise every percentage in one sitting. Layer your revision: first lock the four IRAC categories, then the 90-day triggers, then provisioning percentages, and finally the recovery laws. Solve at least five numerical problems on provisioning and NPA ratios so the calculation becomes automatic under exam pressure. Build your overall preparation around the full CAIIB overview and the dedicated Advanced Bank Management course, and read related explainers on the blog to reinforce the concepts.
Frequently Asked Questions
What is the 90-day rule for NPA classification?
An advance becomes an NPA when interest or principal stays overdue for more than 90 days for term loans, or when a cash-credit account remains out of order for more than 90 days. Agricultural loans follow a crop-season-based rule instead.
How much provision is needed for a sub-standard asset?
A sub-standard asset attracts 15% provision on the secured portion and 25% on the unsecured portion of the outstanding balance, as per RBI IRAC norms.
What is the difference between Gross NPA and Net NPA?
Gross NPA is the total value of all non-performing assets, while Net NPA is Gross NPA minus the provisions already held against them. Net NPA reflects the bank's true uncovered exposure.
What are SMA-0, SMA-1 and SMA-2 accounts?
They are Special Mention Account stages flagging early stress: SMA-0 is up to 30 days overdue, SMA-1 is 31–60 days, and SMA-2 is 61–90 days. They give banks time to act before the account slips to NPA.
Which laws help banks recover NPAs?
The main tools are the SARFAESI Act 2002, Debt Recovery Tribunals, and the Insolvency and Bankruptcy Code 2016, supported by compromise settlements, Lok Adalats and sale to Asset Reconstruction Companies.
Conclusion
NPA management sits at the heart of Advanced Bank Management because it ties together income recognition, provisioning, capital and recovery law. If you can classify an asset correctly, compute its provision, and name the right recovery tool, you have secured a reliable cluster of marks. Revise the IRAC table until it is second nature, practise the numericals, and walk into the exam knowing this is your scoring zone. Start your focused prep today with our CAIIB practice tests and turn asset-quality questions into guaranteed points.
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