IRAC Norms, Provisioning and Ind AS 109 ECL Explained

IRAC norms, provisioning and Ind AS 109 ECL form the backbone of how Indian banks recognise income, classify advances and provide for credit losses, and they are among the most heavily tested areas in the IIBF Certified Accounting and Audit Professional examination. Mastering IRAC norms, provisioning and Ind AS 109 ECL means understanding when an account turns into a non-performing asset, how much provision the bank must carry, and how the forward-looking expected credit loss framework reshapes the older incurred-loss thinking. This guide walks through asset classification, provisioning percentages, the three-stage ECL model, and the audit checks that hold the whole system together for the 2026 exam cycle.

IRAC norms and asset classification

Income Recognition and Asset Classification (IRAC) norms issued by the Reserve Bank of India decide when interest on an advance can be booked as income and how the advance itself is graded. The core trigger is the 90-day overdue rule: a term loan becomes a non-performing asset (NPA) when interest or principal remains overdue for more than 90 days. For cash credit and overdraft accounts, the account is treated as out of order when the outstanding balance stays above the sanctioned limit or drawing power, or there are no credits for 90 days.

Once an account is classified as NPA, income recognition becomes cash-based rather than accrual-based. Banks must reverse any interest already credited but not realised. The classification ladder runs through four stages:

• Standard asset — no default, normal risk.
• Sub-standard asset — NPA for up to 12 months.
• Doubtful asset — NPA for more than 12 months.
• Loss asset — identified as uncollectible by the bank, auditor or RBI inspection.

The classification must be borrower-wise, not facility-wise, so if one account of a borrower is NPA, all facilities are tagged accordingly. Candidates should practise these triggers on the IIBF mock tests to internalise the timelines, since the exam loves date-based numerical questions.

Provisioning requirements for standard and non-performing assets

Provisioning is the buffer a bank sets aside against expected and unexpected losses. Under the RBI prudential framework, even standard assets attract a general provision, while NPAs attract progressively steeper provisioning as recovery prospects fade. The headline percentages every exam aspirant must remember are:

• Standard assets — 0.25% to 1% depending on the sector (for example, 1% on commercial real estate, 0.25% on direct agriculture and SME).
• Sub-standard assets — 15% on the total outstanding, rising to 25% for unsecured exposures.
• Doubtful assets — 100% on the unsecured portion, plus 25% to 100% on the secured portion depending on how long the asset has stayed doubtful.
• Loss assets — 100% provision; the asset should ideally be written off.

The secured portion of a doubtful asset is graded by age: 25% up to one year, 40% for one to three years, and 100% beyond three years. Provisioning is computed net of eligible deductions such as ECGC or CGTMSE cover and realisable value of tangible security. The aggregate of these provisions feeds the Provision Coverage Ratio (PCR), a key supervisory metric. Linking provisioning logic to live policy rates on the RBI rates resource helps candidates see how macro conditions tighten or loosen these buffers.

The expected credit loss model under Ind AS 109

While RBI IRAC norms govern regulatory reporting today, Ind AS 109 introduces the forward-looking Expected Credit Loss (ECL) model that banks are preparing to adopt. Unlike the incurred-loss approach that recognised provisions only after a default event, ECL requires banks to estimate losses upfront based on probability-weighted outcomes, the time value of money and reasonable, supportable information about future conditions. Within the broader framework of IRAC norms, provisioning and Ind AS 109 ECL, this model operates in three stages:

• Stage 1 — performing assets; recognise 12-month ECL.
• Stage 2 — significant increase in credit risk (SICR) since origination; recognise lifetime ECL, interest still on gross carrying amount.
• Stage 3 — credit-impaired assets; recognise lifetime ECL, 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), discounted to present value. The shift from IRAC to ECL means provisions become more responsive to economic cycles, often front-loading losses during downturns. This is conceptually richer than the rule-based IRAC system, so reinforce the PD-LGD-EAD logic through the spaced-repetition drills on the match-the-pair game and review recent regulatory commentary on IIBF news.

Statutory and concurrent audit, LFAR and fraud reporting

The accounting numbers are only as reliable as the audit that validates them. Statutory audit of a bank covers the annual financial statements and expresses an opinion on whether they show a true and fair view, including the correctness of NPA classification and provisioning. Concurrent audit runs alongside transactions, providing a near-real-time check on high-risk branches, treasury and large advances so that errors are caught before they age into the next reporting period.

Two reporting instruments are exam favourites:

• Long Form Audit Report (LFAR) — a detailed questionnaire-based report by statutory auditors covering advances, deposits, NPAs, frauds and internal controls, submitted to bank management and the RBI.
• Red Flagged Account (RFA) and fraud reporting — accounts showing Early Warning Signals are tagged as RFA; if fraud is confirmed, banks must report to RBI through the FMR (Fraud Monitoring Returns) within prescribed timelines, generally 21 days of detection.

Auditors test the bank IRAC system, recompute provisioning samples and check whether ECL staging is supportable. A weak control here distorts capital adequacy and invites supervisory action. To benchmark your grasp of these audit instruments against full-length papers, work through the graded sets on the practice tests and read related explainers on the iibf.store blog.

Conclusion and next steps

IRAC norms, provisioning and Ind AS 109 ECL together explain how a bank measures the health of its loan book, sets aside capital against losses, and proves the numbers through statutory and concurrent audit, LFAR and fraud reporting. For the Certified Accounting and Audit Professional exam, commit the 90-day NPA trigger, the provisioning percentages and the three ECL stages to memory, then test recall under timed conditions. Start your revision now with the full-length IIBF practice tests and keep exploring focused study notes on the iibf.store blog to push your score higher. For the authoritative master circular, refer to the Reserve Bank of India website.