IRAC Norms and Ind AS 109 ECL: Provisioning in Banks Explained

IRAC norms and provisioning form the backbone of how Indian banks recognise bad loans and set aside capital against them. IRAC stands for Income Recognition and Asset Classification. The RBI's prudential framework that decides when a loan turns into a Non-Performing Asset (NPA), how it is graded, and how much provision the bank must hold. Layered on top is the global shift toward Ind AS 109 and its expected credit loss (ECL) model. For candidates of the Certified Accounting and Audit Professional course, mastering IRAC norms and provisioning alongside ECL is indispensable.

This article explains asset classification, the provisioning ladder, and how the forward-looking ECL approach differs from the traditional incurred-loss method.

What IRAC norms mean

The income recognition principle under IRAC norms and provisioning is conservative: a bank may not book interest income on an NPA on an accrual basis; income is recognised only when actually received. This prevents banks from showing phantom profits on loans that have stopped performing. A loan becomes an NPA when interest or principal remains overdue for more than 90 days for term loans. Or when an account stays out of order or a bill stays overdue beyond the prescribed period for cash credit and bills.

Asset classification then sorts loans by the depth of distress. The four categories are Standard, Sub-standard, Doubtful and Loss assets. Standard assets are performing; the other three are NPAs of increasing severity. The classification is borrower-wise, meaning if one facility of a borrower is an NPA, all facilities to that borrower are generally treated as NPAs. This disciplined recognition is what keeps bank balance sheets honest and comparable. The definitive rules live in the RBI master circular on rbi.org.in, and you can follow updates via the IIBF news page.

Asset classification categories

Understanding each bucket is central to IRAC norms and provisioning:

• Standard asset: the loan is performing and carries normal risk; it is not an NPA.
• Sub-standard asset: an asset that has remained an NPA for up to 12 months. Credit weaknesses are evident and recovery is doubtful in part.
• Doubtful asset: an asset that has stayed in the sub-standard category for 12 months, so it has been an NPA for more than 12 months. Recovery is highly questionable.
• Loss asset: an asset identified by the bank, auditor or RBI inspection as uncollectible, where continuance as a bankable asset is unwarranted even if some salvage value exists.

The longer an asset remains impaired, the lower its realisable value is presumed to be, which directly drives the provisioning requirement upward.

The provisioning ladder

Provisioning is the amount a bank charges to its profit and loss account to cover expected loss on a loan. Under IRAC norms and provisioning, the rate rises with the severity of classification and, for secured doubtful assets, with the age of the doubtful period. Indicative provisioning percentages are:

Standard assets also attract a small general provision that varies by sector, with higher rates for stressed segments. These percentages are prudential floors; banks may provide more under their board-approved policy. The cumulative effect is a strong buffer against credit losses, reinforcing solvency. Build fluency in these numbers with the CAIIB programme and lock them in through repeated mock tests.

From incurred loss to Ind AS 109 ECL

Traditional IRAC norms and provisioning follow an incurred-loss model: a provision is made only after an asset has actually become an NPA. The global accounting standard IFRS 9. Mirrored in India as Ind AS 109, replaces this with a forward-looking expected credit loss (ECL) model that requires banks to provide for likely future losses from the moment a loan is originated. ECL is built on three parameters: Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD).

Ind AS 109 stages exposures into three buckets. Stage 1 covers performing loans, where a 12-month ECL is provided. Stage 2 captures loans with a significant increase in credit risk since origination, attracting lifetime ECL. Stage 3 covers credit-impaired (defaulted) loans, also at lifetime ECL but with interest computed on the net carrying amount. The RBI has signalled a phased transition for banks toward this framework. Candidates should be able to contrast the backward-looking IRAC approach with the anticipatory ECL model, since exam questions frequently juxtapose the two. Read deeper explainers on the iibf.store blog.

Why both frameworks matter

For now, Indian banks compute provisions under IRAC norms for regulatory purposes while preparing for the ECL transition. The two coexist in the exam too: you may be asked to classify an account, compute its IRAC provision, and then explain how an ECL model would treat the same exposure across its three stages. A quick way to cement the PD, LGD and EAD relationship is the concept-pairing drill in the match game. The shift to ECL is one of the most consequential changes in bank accounting, so expect it to feature prominently in future papers. A practical tip for numerical questions is to first fix the classification and the secured versus unsecured split, then apply the correct provisioning percentage to each portion, and finally sum the provision. For ECL questions, remember that staging drives whether you use a 12-month or lifetime horizon, and that a significant increase in credit risk, not just actual default, is enough to push an exposure from Stage 1 into Stage 2.

Conclusion

IRAC norms and provisioning, together with the emerging Ind AS 109 ECL framework, define how Indian banks measure and absorb credit losses. Command asset classification, the provisioning ladder and the three-stage ECL model, and you will handle a high-weight portion of the IIBF accounting and audit syllabus with ease. Keep in mind that the direction of travel in Indian banking is firmly toward forward-looking provisioning, so the candidate who understands why ECL is more prudent than the incurred-loss approach will be better prepared for both the exam and the profession. Put it to the test today at iibf.store/tests and turn these concepts into confident marks.