IRAC Norms and NPA Provisioning: 2026 Exam Guide

For any banker preparing for the IIBF Certified Accounting and Audit Professional certificate, the irac norms are non-negotiable territory. IRAC stands for Income Recognition, Asset Classification and Provisioning, and these RBI prudential rules decide when a loan stops earning income, how it is graded as standard or non-performing, and how much capital a bank must set aside against it. Get this framework wrong in the field and the bank's balance sheet is misstated; get it wrong in the exam and you lose the single most heavily weighted topic in the paper.

This guide walks through the master directions on asset classification, the 90-day overdue rule, provisioning percentages, the move to expected credit loss under Ind AS 109, and the statutory audit and LFAR angles that examiners love. Every number here is current to 2026 and aligned to RBI's Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning.

Treat this as your revision spine. Pair it with the practice sets on our test series and you will walk into the hall confident on the toughest scoring area.

What the IRAC Norms Actually Require

The irac norms rest on a simple trigger: an asset becomes a Non-Performing Asset (NPA) when it ceases to generate income for the bank. For a term loan, that happens when interest and/or principal instalment remains overdue for more than 90 days. For a cash credit or overdraft account, it becomes NPA if the account is out of order — the outstanding balance remains continuously above the sanctioned limit or drawing power for 90 days, or there are no credits enough to cover the interest debited.

• Income recognition — banks must recognise income on accrual only for standard assets. Once an account is NPA, interest cannot be booked as income unless actually realised in cash.
• Asset classification — every advance is graded as Standard, Sub-Standard, Doubtful or Loss based on the period it has stayed non-performing and the realisable value of security.
• Provisioning — a prescribed percentage of the outstanding is charged to the profit and loss account, reducing reported profit and building a cushion against default.

RBI's principle is that classification is borrower-wise, not facility-wise: if one facility of a borrower is NPA, all facilities of that borrower are treated as NPA. This catches candidates off guard, so memorise it. The bedrock reference is the Reserve Bank of India master circular, which every statutory auditor verifies against.

Asset Classification and Provisioning Percentages

Once an account turns NPA, the clock determines its grade. A Sub-Standard asset is one that has remained NPA for up to 12 months. A Doubtful asset has stayed NPA beyond 12 months, and a Loss asset is one identified as uncollectible by the bank, internal/external auditor or RBI inspection, though some salvage value may exist.

The provisioning ladder you must reproduce in the exam:

• Standard assets — a general provision of 0.40% (with higher rates for stressed sectors such as commercial real estate at 1%).
• Sub-standard — 15% of outstanding; 25% where the advance is unsecured ab-initio.
• Doubtful — 100% provision on the unsecured portion, plus 25% / 40% / 100% on the secured portion for D1 (up to 1 year), D2 (1 to 3 years) and D3 (over 3 years) respectively.
• Loss assets — 100% provision, or the asset is written off entirely.

Provisioning Coverage Ratio (PCR) is the aggregate of these provisions against gross NPAs; RBI expects banks to maintain a healthy PCR as a resilience signal. Candidates building speed on these percentages find the match-the-pairs game a quick way to drill grade-to-provision mapping before the exam.

Ind AS 109 and the Expected Credit Loss Model

The biggest conceptual shift the syllabus tests is the move from the RBI incurred-loss approach to the forward-looking Expected Credit Loss (ECL) model under Ind AS 109. Where IRAC waits for a 90-day default to recognise impairment, ECL requires a bank to estimate and provide for likely losses from day one of lending. RBI has issued a draft framework moving regulated entities toward an ECL-based provisioning regime, and the exam expects you to compare the two.

Ind AS 109 sorts financial assets into three stages. Stage 1 covers performing assets, where a 12-month ECL is provided. Stage 2 captures assets with a significant increase in credit risk since origination, attracting a lifetime ECL. Stage 3 is credit-impaired — broadly the equivalent of an NPA — also at lifetime ECL but with interest computed on the net carrying amount.

ECL is built from three parameters: Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD), multiplied and discounted to present value. The model is more judgemental and data-hungry than IRAC, which is precisely why statutory auditors scrutinise the assumptions. For deeper grounding on the accounting standards behind this, work through the modules in the CAIIB programme, which feed directly into the CAAP syllabus.

Statutory Audit, LFAR and the Auditor's Lens

The audit half of the certificate examines how an auditor independently validates the bank's irac norms compliance. During the statutory branch audit, the auditor re-performs NPA identification, checks that the system has not suppressed slippages, verifies the drawing power calculation against current stock and debtor statements, and confirms that provisions match the prescribed percentages.

The Long Form Audit Report (LFAR) is the structured questionnaire that branch and central statutory auditors complete alongside the main audit report. It probes advances, asset classification, the adequacy of documentation, large and overdue accounts, frauds, and the functioning of internal controls. Examiners frequently ask what the LFAR covers and how it differs from the main report — the LFAR is more granular and operational, feeding the central auditor's overall opinion.

• Memorandum of changes (MOC) — auditors record any reclassification or additional provisioning the branch must pass, ensuring the published accounts are corrected.
• Divergence in asset classification — RBI mandates disclosure when its assessed NPAs and provisions exceed the bank's own figures by specified thresholds, a favourite exam point.
• Income reversal — interest wrongly booked on accounts that should have been NPA must be reversed; auditors test this rigorously.

Keep current with regulatory updates through IIBF news and the live RBI rates dashboard, both of which surface circular changes you can be questioned on.

Restructuring, Upgradation and Recovery Linkages

The norms do not stop at classification. A restructured standard account is generally downgraded to sub-standard on restructuring, attracting higher provisioning, and can be upgraded only after a satisfactory performance period. An NPA can be upgraded to standard only when the entire arrears of interest and principal are paid by the borrower — partial recovery does not upgrade the account.

Recovery mechanisms interlock with provisioning: enforcement under the SARFAESI Act 2002, resolution under the Insolvency and Bankruptcy Code 2016, and compromise settlements all affect realisable value and therefore the provision held. Sale of stressed assets to Asset Reconstruction Companies and the treatment of security receipts is another examinable corner. Understanding these recovery routes alongside the irac norms gives you the complete credit-lifecycle picture the paper rewards.

Frequently Asked Questions

Final Takeaways

The irac norms, NPA provisioning, the Ind AS 109 ECL transition, and the statutory audit and LFAR framework together form the highest-yield cluster in the Certified Accounting and Audit Professional exam. Lock in the 90-day rule, the four asset grades, the provisioning percentages, and the auditor's validation process, and you cover most of the marks. Ready to test yourself? Start with our full-length practice sets on the IIBF test series and reinforce the accounting foundations through the JAIIB course before exam day.