IRAC Norms, Provisioning & Ind AS 109 ECL Explained

IRAC norms, provisioning and Ind AS 109 ECL form the financial backbone of how every Indian bank recognises income on its loans, grades each advance for risk, and sets aside capital against the losses it expects to suffer. For anyone preparing for the IIBF Certified Accounting and Audit Professional (CAAP) examination, this is not optional reading — it is one of the most heavily weighted and most frequently tested clusters in the entire paper. Get the 90-day trigger, the provisioning percentages and the three-stage expected credit loss model right, and you have already secured a meaningful chunk of your score.

This guide rebuilds the whole topic from the ground up: how the Reserve Bank of India's Income Recognition and Asset Classification rules work, exactly how much provision a bank must carry at each stage, how the forward-looking ECL framework under Ind AS 109 reshapes the older incurred-loss thinking, and how statutory and concurrent audit hold the entire system honest. Wherever a figure is time-sensitive, treat the numbers below as indicative of the long-standing RBI framework and always confirm the current percentages against the latest RBI master circular and the official IIBF notification before your exam.

If you want a structured revision path while you read, the full Certified Accounting and Audit Professional course hub sequences these chapters with notes, classes and tests, so you can move from concept to recall without losing the thread.

What IRAC norms are and why they matter

IRAC norms — short for Income Recognition and Asset Classification — are issued by the Reserve Bank of India to settle two linked questions for every loan a bank holds. First, when can the interest on an advance legitimately be recognised as income in the bank's books? Second, how should the advance itself be graded so that the balance sheet reflects its true risk?

The principle that governs both is prudence. A bank cannot keep counting interest as profit on a loan that has stopped paying, because that would inflate income and mask deterioration in the loan book. IRAC norms convert a borrower's behaviour into an accounting consequence, and that linkage is precisely what the CAAP exam tests through date-based and scenario questions.

The 90-day rule and asset classification ladder

The central trigger under IRAC norms is the 90-day overdue rule. A term loan becomes a non-performing asset (NPA) when interest or a principal instalment 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 continuously above the sanctioned limit or drawing power, or when there are no credits for 90 days, or the credits are not enough to cover the interest debited in that period.

The moment an account is classified as NPA, income recognition switches from accrual to cash basis — the bank can only book interest it actually receives, and it must reverse any interest already credited but not realised. From there, the advance is graded down a four-rung ladder:

• Standard asset — no default and only the normal business risk; the loan is performing.
• Sub-standard asset — an account that has remained NPA for up to 12 months.
• Doubtful asset — an account that has stayed NPA for more than 12 months.
• Loss asset — identified as uncollectible by the bank, its auditors or an RBI inspection, even if a small recoverable value remains.

One detail trips up many candidates and so it recurs in the exam: classification is borrower-wise, not facility-wise. If a single account of a borrower turns NPA, all the facilities extended to that borrower are tagged accordingly. You can drill these timelines until they are automatic using the CAAP mock tests, where date-based numerical questions are exactly the format you will face.

Provisioning requirements across asset categories

Provisioning is the buffer a bank sets aside against expected and unexpected losses on its advances. Under the RBI prudential framework, even standard assets attract a general provision, while NPAs attract progressively steeper provisioning as the likelihood of recovery falls. The headline percentages every CAAP aspirant should commit to memory are summarised below.

The secured portion of a doubtful asset is graded by how long it has stayed doubtful: roughly 25% up to one year, 40% for one to three years, and 100% beyond three years. Importantly, provisioning is computed net of eligible deductions such as ECGC or CGTMSE guarantee cover and the realisable value of tangible security, so the gross outstanding is rarely the base. The aggregate of all these provisions feeds the Provision Coverage Ratio (PCR), a supervisory metric that tells regulators how well a bank has cushioned itself against its bad loans.

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) framework that banks are progressively preparing to adopt. The philosophical shift is the heart of this section. The older incurred-loss approach recognised a provision only after a default event had actually occurred. The ECL model instead requires a bank to estimate losses upfront, based on probability-weighted outcomes, the time value of money, and reasonable and supportable information about future economic conditions.

Within the wider world of IRAC norms, provisioning and Ind AS 109 ECL, this model operates across three clearly defined stages, and the way interest is computed changes as an asset deteriorates:

• Stage 1 — performing assets: recognise a 12-month ECL; interest is computed on the gross carrying amount.
• Stage 2 — significant increase in credit risk (SICR) since origination: recognise lifetime ECL; interest is still on the gross carrying amount.
• Stage 3 — credit-impaired assets: recognise lifetime ECL; interest is computed only on the net carrying amount.

Each ECL figure is built from three inputs you must be able to define cold: the Probability of Default (PD), the Loss Given Default (LGD) and the Exposure at Default (EAD), with the result discounted to present value. Because PD, LGD and EAD respond to the economic cycle, the ECL approach tends to front-load losses during downturns, making provisions far more sensitive to macro conditions than the rule-based IRAC system. To lock in the PD-LGD-EAD logic, run the spaced-repetition drills in the CAAP matching games, then read the deeper walkthrough in our Ind AS 109 ECL provisioning guide for banks.

IRAC versus Ind AS 109 ECL at a glance

Statutory and concurrent audit, LFAR and fraud reporting

The accounting numbers are only as reliable as the audit that validates them, which is why audit is examined alongside the accounting. A statutory audit of a bank covers the annual financial statements and expresses an opinion on whether they present a true and fair view — and that explicitly includes the correctness of NPA classification and provisioning. A concurrent audit runs alongside transactions, providing a near-real-time check on high-risk areas such as branches, treasury and large advances, so errors are caught before they age into the next reporting period.

Two reporting instruments are perennial exam favourites and deserve precise definitions:

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

In practice, auditors test the bank's IRAC system end to end: they recompute provisioning on a sample of accounts and check whether the ECL staging is supportable. A weak control here distorts capital adequacy and can invite supervisory action. To see how these instruments knit together in a live engagement, study our statutory bank audit and LFAR CAAP guide and the focused Long Form Audit Report (LFAR) 2026 exam guide.

A practical study plan for this topic

Concepts this dense reward a deliberate sequence rather than passive re-reading. Here is a four-step plan that mirrors how strong CAAP candidates actually revise:

1. Anchor the triggers first. Memorise the 90-day rule and the four classification stages until you can reproduce them without hesitation — everything else hangs off these.
2. Layer on the percentages. Learn standard, sub-standard, doubtful and loss provisioning together as a single matrix, then practise the age-based grading of secured doubtful assets.
3. Contrast IRAC with ECL. Do not study Ind AS 109 in isolation; learn it as the forward-looking answer to the questions IRAC handles with fixed rules. The comparison table above is built for exactly this.
4. Test under time pressure. Move to full-length papers so that classification and computation become reflexes. The graded sets on the CAAP practice tests replicate the exam's numerical style.

For a broader sweep of every chapter and where this topic sits in the wider paper, the CAAP syllabus 2026 with free PDF maps the full course, and you can browse all on-topic explainers in one place through the complete CAAP guides hub.

Common mistakes to avoid

• Classifying facility-wise instead of borrower-wise. If one account of a borrower is NPA, every facility of that borrower follows — a single overlooked account can cost the question.
• Applying provisioning to the gross outstanding. Provisions are computed net of ECGC or CGTMSE cover and realisable security, so always net off eligible deductions first.
• Forgetting to reverse unrealised interest. Once an account is NPA, interest already credited but not received must be reversed, and recognition turns cash-based.
• Confusing the ECL stages. Stage 1 carries a 12-month ECL; Stages 2 and 3 carry a lifetime ECL, and only in Stage 3 does interest shift to the net carrying amount.
• Treating IRAC percentages as permanent. These are regulatory figures that the RBI can revise — always confirm them against the latest master circular before relying on a number.

Frequently asked questions

When does a term loan become an NPA under IRAC norms?

A term loan becomes a non-performing asset when interest or a principal instalment remains overdue for more than 90 days. From that point, income on the account must be recognised on a cash basis rather than on accrual. Any unrealised interest already booked has to be reversed out of the bank's income.

What provision is required on a sub-standard asset?

A sub-standard asset generally attracts a 15% provision on the total outstanding balance. Where the exposure is unsecured with no realisable security, the provision rises to about 25% of the outstanding amount. Always verify the current rate against the latest RBI master circular before the exam.

How does the Ind AS 109 ECL model differ from IRAC provisioning?

IRAC provisioning is rule-based and largely recognises losses after a default event has occurred. The Ind AS 109 expected credit loss model, by contrast, is forward-looking and estimates probability-weighted losses upfront using PD, LGD and EAD across three stages. This makes ECL provisions far more responsive to changing economic conditions.

What is the difference between the three ECL stages?

Stage 1 covers performing assets and carries a 12-month ECL with interest on the gross carrying amount. Stage 2 applies when there is a significant increase in credit risk and carries a lifetime ECL, still with interest on the gross amount. Stage 3 covers credit-impaired assets, carrying a lifetime ECL with interest computed only on the net carrying amount.

What is a Long Form Audit Report (LFAR)?

LFAR is a detailed, questionnaire-based report prepared by the statutory auditors of a bank. It covers advances, deposits, NPA classification, provisioning, frauds and internal controls. The report is submitted to bank management and the RBI to supplement the main audit opinion and highlight areas of supervisory concern.

Why is asset classification done borrower-wise rather than facility-wise?

RBI requires borrower-wise classification so that the true credit risk of a borrower is not disguised by spreading exposure across several facilities. If any one account of a borrower becomes NPA, all facilities extended to that borrower are classified as NPA together. This prevents banks from understating the real extent of their stressed assets.

Conclusion

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 those numbers through statutory and concurrent audit, LFAR and fraud reporting. For the CAAP exam, internalise the 90-day NPA trigger, the provisioning matrix and the three ECL stages, then test that knowledge under timed conditions until it becomes instinct. Start your next revision sprint with the full-length CAAP practice tests, and for the authoritative position always cross-check the source material on the official IIBF website. Stay consistent, revise actively, and the marks will follow.

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