IRAC norms Explained: NPA Classification for the CAAP Exam

IRAC norms — the Income Recognition and Asset Classification framework laid down by the Reserve Bank of India — are the single most heavily tested topic in the IIBF Certified Accounting and Audit Professional (CAAP) exam. If you can confidently apply IRAC norms to any loan account, decide whether it is standard or impaired, and compute the correct provision, you have already secured a large block of marks. This guide walks through every component an auditor and exam candidate must master: the 90-day NPA rule, the four asset classes, provisioning percentages, the Ind AS 109 expected credit loss model, the Long Form Audit Report (LFAR) and fraud reporting obligations.

For bankers, IRAC norms are not just an exam abstraction. They determine reported profitability, capital adequacy and the integrity of the balance sheet, which is exactly why the statutory auditor's role sits at the centre of the syllabus. Pair this article with structured practice on iibf.store/tests to lock the concepts in.

What Are IRAC Norms and Why They Matter

IRAC norms govern two linked questions a bank must answer for every advance: when can it recognise interest as income, and how should it classify the underlying asset? Under prudential accounting, income on an impaired loan cannot be booked on an accrual basis — it can only be recognised when actually realised. This stops banks from inflating profits with interest that may never be collected. The asset classification limb then grades each loan by the degree of credit weakness, so that a realistic provision can be made against probable loss.

The Reserve Bank prescribes these norms through its Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning. You can read the source framework directly on the regulator's site at RBI, and the CAAP exam expects familiarity with the circular's structure. For candidates building their foundation, the CAIIB course material on bank accounting overlaps heavily with this topic. A clear grasp of IRAC norms underpins almost every audit judgement an accounting professional will later make in the field, from sampling advances to forming an audit opinion.

The 90-Day NPA Rule and Asset Classification

The trigger that converts a performing loan into a Non-Performing Asset (NPA) is the 90-day rule. A term loan becomes an NPA when interest or principal instalment remains overdue for more than 90 days. For a cash credit or overdraft, the account is an NPA if it stays out of order for more than 90 days; for bills, if they remain overdue for more than 90 days. Agricultural advances follow a crop-season-linked rule — two crop seasons for short-duration crops and one for long-duration crops.

Once an account is an NPA, IRAC norms slot it into one of four asset classes:

• Standard asset: a performing loan carrying no more than normal risk; not an NPA.
• Sub-standard asset: an account that has remained an NPA for up to 12 months.
• Doubtful asset: an account that has stayed in the sub-standard category for 12 months, so it has been an NPA for more than 12 months.
• Loss asset: a loan identified as uncollectible by the bank, auditor or RBI inspection, where the value is so eroded that continuance as a bankable asset is not warranted, even if some salvage value remains.

Exam questions frequently give a date of default and ask you to state the classification on a later balance-sheet date — so practise counting forward through the 90-day and 12-month thresholds. Mastery of IRAC norms here is mostly arithmetic discipline plus knowing the definitions cold. Reinforce the timeline with the quick-recall drills at iibf.store/games/match.

Provisioning Percentages Under IRAC Norms

Classification drives provisioning, and provisioning percentages are a guaranteed CAAP question. Under the IRAC norms framework the broad provisioning requirements are:

• Standard assets: a general provision (for example, 0.25% for direct agriculture and SME, 1% for commercial real estate, and 0.40% for most other standard advances).
• Sub-standard assets: 15% of the outstanding, rising to 25% where the advance is unsecured ab initio.
• Doubtful assets — secured portion: 25% up to one year as doubtful, 40% for one to three years, and 100% beyond three years.
• Doubtful assets — unsecured portion: 100% provision.
• Loss assets: 100% provision, or the asset is written off entirely.

Note how the provision tracks the realisable value of security: as recovery prospects fade, the percentage climbs toward full write-down. Candidates should be able to split a doubtful account into its secured and unsecured portions and provision each correctly — a classic two-mark calculation. Because RBI revises specific rates from time to time, always cross-check the latest figures against the current Master Circular and the live policy updates at iibf.store/resources/rbi-rates. Applying IRAC norms accurately at this stage is what separates a high scorer from an average one.

Ind AS 109 ECL, LFAR, Statutory Audit and Fraud Reporting

The CAAP syllabus layers modern accounting and audit obligations on top of the classical IRAC norms. Under Ind AS 109, banks move from an incurred-loss model to a forward-looking Expected Credit Loss (ECL) model. ECL classifies exposures into three stages — Stage 1 (12-month ECL for performing loans), Stage 2 (lifetime ECL where credit risk has increased significantly), and Stage 3 (lifetime ECL for credit-impaired assets). While RBI's IRAC provisioning still governs regulatory reporting, candidates must understand how ECL and IRAC norms coexist and where the higher of the two amounts applies. The standard-setting background is available from the ICAI.

The statutory audit of a bank tests whether advances are correctly classified and provided for under IRAC norms; misclassification is a common audit finding. The Long Form Audit Report (LFAR) is a structured questionnaire the auditor completes covering credit appraisal, monitoring, NPA identification and other controls — a frequent exam topic, so memorise its main heads. Finally, an accounting and audit professional must understand fraud reporting: banks report frauds to RBI through the prescribed returns, and auditors who suspect fraud have reporting duties under the Companies Act and RBI directions. Together, IRAC norms, ECL, LFAR and fraud reporting form the integrated audit picture the CAAP exam rewards. Track ongoing regulatory changes via iibf.store/resources/iibf-news.

Frequently Asked Questions

IRAC norms reward repeated, timed practice more than any other CAAP topic, because most questions are application-based calculations rather than theory. Build a habit of classifying sample accounts and computing provisions until it becomes automatic, then validate yourself under exam conditions. Start your focused preparation now with the practice sets and mock exams at iibf.store/tests, and revisit this guide whenever you need to refresh the IRAC norms framework before test day.