IRAC Norms 2026: Income Recognition, Asset Classification & Provisioning

You are auditing a bank's advances portfolio. The branch manager tells you a loan is performing on paper. But the borrower hasn't paid interest in six months.

Which IRAC norm do you apply? How much provision must the bank hold? These aren't abstract questions—they determine whether the bank's balance sheet reflects reality.

And whether you pass your CERTIFIEDACC exam.

IRAC norms (Income Recognition. Asset Classification, Provisioning) form the backbone of bank audits in India. They sit at the heart of statutory audits.

Concurrent audits, and your CERTIFIEDACC syllabus. In this guide. We'll decode how income is recognised.

How assets are classified. What provision norms mean. And how auditors verify compliance—so you walk into your exam with confidence.

Clarity.

What Are IRAC Norms? The Banking Audit Foundation

IRAC stands for Income Recognition, Asset Classification, and Provisioning. These are regulatory guidelines issued by the RBI that banks must follow when handling advances (loans). Other assets.

Think of IRAC as the auditor's rulebook—it tells you when a bank can claim income. How to label a loan's health. And how much money the bank must set aside as a buffer.

Why do these norms exist? Because banks lend money to borrowers who may not repay. If a bank doesn't recognise when a loan is in trouble.

It overstates profit and hides risk from depositors. IRAC norms force transparency. For you as an auditor.

IRAC compliance is non-negotiable—regulators. The RBI. And the bank's board all expect your audit report to verify it.

These norms are issued under the RBI's regulatory framework. Are binding on all Scheduled Commercial Banks. They tie directly to Ind AS 109 (Expected Credit Loss) for financial reporting.

And they feed into your bank's CRAR (Capital Adequacy Ratio) calculations. Master IRAC norms. And you've mastered the audit trail for nearly every advance in a bank's books.

The CERTIFIEDACC syllabus dedicates substantial weight to IRAC. It is the single most audited area in bank statutory audits. Your understanding of income recognition. Asset classification. And provisioning norms will be tested in multiple scenarios and case studies.

Income Recognition: When Can a Bank Claim It Earned Money?

Here's a common mistake auditors make: they assume a bank earns interest the moment it disburses a loan. Wrong. RBI IRAC norms say a bank can only recognise income when it is due. Reasonably certain to be collected. If the borrower hasn't paid, the bank cannot book the income.

Under IRAC. Interest income is recognised on an accrual basis only if the loan is performing. The moment a loan becomes non-performing (even by one day).

Accrued interest that wasn't received must be reversed from income. Your audit must verify this reversal has been done. Many auditors miss this—they don't cross-check the interest reversal journal entries against the NPA (Non-Performing Asset) schedule.

Principal repayments must also be receivable on their due date. If a loan's instalment is overdue. You treat it as NPA and suspend income recognition.

The rule is simple: No payment, no income. Banks sometimes argue they will collect eventually. Regulators and auditors don't accept promises.

Payment must be received or reasonably certain within the agreed terms.

For CERTIFIEDACC candidates. Focus on the practical side: review interest accrual schedules. Trace them to advances registers. And verify that any loan with overdue payment (even one day past due) has had accrued-but-not-received interest reversed. This single check alone flags many audit findings.

Related concept: dividend and other income from securities follow similar rules. Income is recognised only when it becomes due and receivable. Your audit team must test this across all income streams—not just interest.

Asset Classification Under IRAC Norms: Standard to Loss

Every loan in a bank's portfolio falls into one of four categories under IRAC asset classification: Standard. Sub-Standard, Doubtful, or Loss. These categories are not opinions—they are defined by the number of days a loan payment is overdue. Your audit must verify that every loan is placed in the correct category.

Standard Asset: A loan where the borrower is paying on time. Or if overdue, the overdue amount is less than 30 days. Standard assets carry the lowest risk provision (0.40% for most standard advances). This is where most performing loans sit.

Sub-Standard Asset: A loan with arrears (overdue amount) of 30 days to less than 90 days. A sub-standard asset signals stress—the borrower is struggling. Not yet in deep trouble. The provision requirement jumps to 15% of the outstanding amount. This is a red flag in any audit.

Doubtful Asset: A loan that has remained in arrears for 90 days or more. Doubtful assets are split into three parts based on how long they have been in arrears. The provision ranges from 25% to 100%, depending on the age and recovery likelihood. These assets demand intense scrutiny during audit.

Loss Asset: A loan where the principal or interest has become uncollectible. The bank should write it off and provide 100%. If the bank hasn't written it off, it must still hold 100% provision. In your audit, loss assets are heavily questioned by regulators.

Your job as an auditor: verify the arrear status of every loan. Count the days from the first overdue instalment to the reporting date. Cross-check this against the bank's classification. Misclassification is one of the most common audit findings. Learn more in our AUDIT ASPECTS OF ADVANCES PART 1 class.

Provisioning Norms: How Much Must Banks Set Aside?

Once you've classified an asset. The provisioning norm tells you exactly how much money the bank must reserve (set aside in the profit-and-loss account) as a safeguard against loss. Provisioning is not optional—it's mandatory. And your audit must verify it to the rupee.

Standard Asset Provision: 0.40% of outstanding advances (increased from the legacy 0.25% under older norms). Banks treat this as a general provision to cover unseen risks across the standard portfolio.

Sub-Standard Asset Provision: 15% of the outstanding amount. This is compulsory and non-negotiable. If a bank tries to calculate a lower provision arguing the borrower has pledged security. Reject it—RBI norms are strict. Security value is not a reason to reduce standard sub-standard provision.

Doubtful Asset Provision (by tenure):

• Less than 12 months in doubtful category: 25% provision
• 12 to 18 months in doubtful: 40% provision
• 18 months. Above: 100% provision (or the shortfall between the amount advanced. The realizable value of security. Whichever is higher)

Loss Asset Provision: 100% of the outstanding amount. Non-negotiable.

Why does provision matter for your audit? A bank with insufficient provision understates its true risk and overstates profit. This misleads shareholders and depositors. Regulators scrutinise provision calculations heavily. In your CERTIFIEDACC exam, you will face detailed scenarios asking you to compute the correct provision and spot under-provisioning errors. Read our detailed guide on provisioning and Ind AS 109 ECL here.

Practical audit tip: create an advances schedule with columns for classification. Outstanding amount, provision rate (%), and provision amount (Rs). Cross-check the calculation for every loan above a materiality threshold. Even a 5% error in a large doubtful asset can mean thousands of rupees of incorrect provision.

IRAC Norms, Ind AS 109, and Your Audit Report—Bringing It Together

Here's where the complexity deepens: IRAC norms are regulatory norms issued by RBI. But banks also report under Ind AS 109 (Indian Accounting Standard 109). Which requires them to calculate Expected Credit Loss (ECL) for financial reporting purposes. These two frameworks coexist, and as an auditor, you must understand both.

IRAC is prescriptive—it gives you a formula: days overdue = classification = provision amount. Ind AS 109 is more principles-based—it asks: what is the probability of default. And what is the expected loss?

Often, IRAC provision and Ind AS 109 ECL converge, but sometimes they diverge. Your audit report must address both. And you must explain why they differ (if they do).

Under Ind AS 109, banks use three stages:

• Stage 1 (12-month ECL): Performing loans with low credit risk—ECL is for expected losses over the next 12 months.
• Stage 2 (Lifetime ECL): Loans with significant increase in credit risk. Not yet defaulted—ECL covers the entire life of the loan.
• Stage 3 (Lifetime ECL for credit-impaired): Defaulted loans—full lifetime ECL applies.

In most cases. IRAC classifications map to Ind AS 109 stages: Standard → Stage 1 or 2. Sub-Standard/Doubtful → Stage 3, Loss → Stage 3 (written off or fully provided). However. Banks may use forward-looking macro-economic factors in ECL calculations that are not part of IRAC's backward-looking classification.

Why is this important? Because in your Long Form Audit Report (LFAR), you will be asked to verify that the bank's provisions (both IRAC and Ind AS 109) are adequate and compliant. If they differ materially, you must disclose and explain the variance. Watch our LONG FORM AUDIT REPORT OF HEAD OFFICE class to see how this plays out in a real audit report.

For CERTIFIEDACC exam preparation. Practise scenarios where you are given an advances schedule with mixed performing. Non-performing loans. And you must compute both IRAC provision and Ind AS 109 ECL. Then reconcile them in your audit conclusion.

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Final Word

IRAC norms—income recognition. Asset classification, and provisioning—are the beating heart of bank audits. You cannot excel in your CERTIFIEDACC exam or succeed as a bank auditor without internalising them.

The rules are clear: no payment. No income; days overdue determine classification; classification determines provision percentage. Simple logic, rigorous execution.

Your next step: download the RBI master circular on advances management from rbi.org.in and read the IRAC section thoroughly. Then, walk through our AUDIT ASPECTS OF ADVANCES PART 1 class and solve case studies where you classify loans, compute provisions, and identify audit adjustments. Finally, review real-world LFAR examples in our LONG FORM AUDIT REPORT OF BANK BRANCHES class to see how IRAC findings are communicated to regulators.

Your CERTIFIEDACC success depends on this mastery. Invest the time now. And you'll walk into your exam room ready to audit advances with precision. Confidence.

Source: Indian Institute of Banking & Finance — iibf.org.in