IRAC and Provisioning Norms for Banks: CAAP Exam Guide

The Certified Accounting. Audit Professional (CAAP) syllabus expects bankers to master how irregular loans are classified. How much capital must be set aside against them.

At the heart of this lies the IRAC framework. The related provisioning norms that the Reserve Bank of India prescribes for every scheduled commercial bank. This guide explains IRAC classification.

The standard-asset and NPA provisioning ladder. Provision Coverage Ratio. Floating provisions, and the gradual shift toward expected credit loss.

Whether you are preparing for CAAP or doing live branch audit work. A firm grasp of these rules is essential.

What IRAC Means and Why It Anchors Provisioning

IRAC stands for Income Recognition, Asset Classification and Provisioning. It is the prudential backbone that decides when a bank can book interest as income. How a loan account is graded by its health. And how much money must be parked against possible loss.

The logic is simple: income should not be recognised on accounts that are no longer servicing their dues. And capital should be conservatively reserved against assets that are turning bad. Asset classification flows directly into provisioning norms. Because the worse the grade, the higher the provision.

Under IRAC. A loan becomes a Non-Performing Asset (NPA) when interest or principal remains overdue for more than 90 days. NPAs are then graded as sub-standard. Doubtful or loss assets, while healthy loans remain standard assets. Each grade carries a defined provision percentage.

• Income Recognition - interest accrual stops once an account is classified NPA. Income is booked only on actual realisation.
• Asset Classification - objective, record-based grading independent of available security.
• Provisioning - graded reserve creation reflecting the realisable value. Ageing of the asset.

Mastering this trio lets a CAAP candidate read any advances portfolio and predict its provision impact. Practice classification scenarios on the iibf.store mock tests to lock in the 90-day rule.

Standard Asset Provisioning Norms

Even performing loans attract a small cushion, called the standard-asset provision. The provisioning norms here are risk-weighted by sector. Some books carry more inherent stress than others.

The general rate for standard assets is 0.40% of the outstanding. But the RBI tunes this for specific categories to discourage concentration in volatile sectors. Agriculture and SME advances enjoy the lowest cushion.

While commercial real estate carries a heavier one because of its cyclicality.

These percentages sit in the 0.25% to 1% band and apply to the funded outstanding, not the sanctioned limit. Standard-asset provisions are shown as a liability under "Other Liabilities and Provisions" and are not netted off the advances figure on the asset side, unlike NPA provisions. For the RBI the aim is counter-cyclical buffering: build reserves in good times so the balance sheet absorbs shocks later. Keep an eye on the latest policy moves through the RBI rates and policy tracker, since standard-asset rates do change.

NPA Provisioning Norms: Sub-Standard, Doubtful and Loss

Once a loan slips into NPA territory. The provisioning norms escalate sharply with both ageing. The realisable value of security.

A sub-standard asset is one that has stayed NPA for up to 12 months. A doubtful asset is one that has remained sub-standard for more than 12 months. And a loss asset is one identified by the bank.

Auditor or RBI inspection as uncollectible but not yet written off.

So a doubtful account is split: the secured portion follows the 25/40/100 ageing ladder while the unsecured portion is always provided at 100%. Loss assets demand a full 100% provision and should ideally be written off. This graded ladder is the single most tested area in CAAP. Drill it with the matching game on iibf.store games until the percentages are automatic.

PCR, Floating Provisions and Counter-Cyclical Buffers

Beyond the account-level ladder, banks watch portfolio-level metrics. The Provision Coverage Ratio (PCR) is the ratio of total provisions held to gross NPAs. And the RBI expects banks to maintain a healthy PCR. Historically benchmarked around 70%.

A strong PCR signals that a bank can absorb defaults without eroding capital. The broader provisioning norms also allow floating provisions. Which are not made against any identified account. As a general cushion. Floating provisions can only be used for contingencies with RBI approval or netted from gross NPAs to compute Net NPA.

Never to dress up operating profit.

• PCR - total provisions divided by gross NPAs; higher is safer.
• Floating provisions - non-specific buffer. Cannot reverse to the profit and loss account freely.
• Counter-cyclical provisioning buffer - built in good years. Drawn down in stress years.
• Net NPA - gross NPA minus provisions held and recoveries due.

For audit purposes, a CAAP professional verifies that floating provisions are disclosed separately and not misused to smooth earnings. Cross-check current macro signals and credit cycle commentary in the IIBF news feed when assessing whether a bank's buffers look adequate.

The Audit Angle: LFAR, Statutory Audit and the ECL Shift

Provisioning is where accounting meets audit. Which is exactly why CAAP fuses the two. During a statutory branch audit.

The auditor independently re-verifies asset classification. Recomputes provisions account by account, and reports divergences. The Long Form Audit Report (LFAR) is the structured questionnaire through.

Branch auditors flag weaknesses in advances. Documentation, and the application of provisioning norms. A misclassified account that understates provisions directly overstates profit.

So this scrutiny protects depositors and shareholders alike.

The bigger change on the horizon is the move from the current "incurred loss" model to the Expected Credit Loss (ECL) framework, aligned with Ind AS 109. Under ECL, banks will provide for anticipated losses on a forward-looking basis rather than waiting for the 90-day default trigger. The ICAI has issued guidance supporting this transition, and the RBI has signalled a phased, model-based implementation.

• Incurred loss - provision only after the default event (today's IRAC rules).
• Expected Credit Loss - forward-looking provision across three stages of credit risk.
• Ind AS 109 - the standard governing classification, measurement and impairment.

For exam readiness, understand both regimes: the live IRAC numbers and the ECL direction. Browse more deep-dives on the iibf.store blog to stay current.

Frequently Asked Questions

Conclusion

IRAC classification and the graded standard-asset, sub-standard, doubtful and loss provisioning ladder form the most heavily tested portion of the CAAP syllabus, and the same provisioning norms drive real statutory audit work. Anchor the 0.25-1% standard band, the 15/25% sub-standard split, the 25/40/100 doubtful ladder, the 100% loss rule, PCR, floating provisions and the ECL direction. Now convert that theory into marks: attempt a timed mock at iibf.store/tests and track your accuracy on classification and provisioning questions today.