NPA classification, IRAC norms and provisioning: CAIIB guide

NPA classification sits at the heart of Advanced Bank Management (ABM) and of how Indian banks measure their own health. Getting NPA classification right means knowing the Reserve Bank of India's Income Recognition and Asset Classification (IRAC) norms. The famous 90-day overdue rule, the four asset categories, and the provisioning a bank must set aside against each. This guide walks CAIIB candidates through the full framework in exam-ready detail, using the prudential definitions banks apply every quarter.

A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment has remained overdue for a specified period. Once an account turns NPA. The bank can no longer recognise interest on it as income unless actually realised — a discipline designed to prevent banks from overstating profits.

What is an NPA and the IRAC framework

Under RBI's IRAC norms, an asset is treated as non-performing when it ceases to generate income for the bank. The IRAC framework has two pillars: income recognition (interest on NPAs is recognised only on realisation. Not on accrual) and asset classification (loans are graded by the degree of risk). This prudential approach, mandated for all scheduled commercial banks, ensures financial statements reflect genuine asset quality.

The framework applies objectively and is "borrower-wise," not "facility-wise" — if one facility of a borrower becomes NPA, all facilities of that borrower are generally classified as NPA. Asset classification must be done consistently each quarter, and banks cannot upgrade an account merely because the borrower promises to pay; the account must be regularised through actual recovery. Proper NPA classification therefore drives both the profit and loss account and the balance sheet, which is why ABM places such heavy weight on it. The detailed master circular is published on the Reserve Bank of India website and is the authoritative source.

The 90-day rule and when an account turns NPA

The cornerstone of NPA classification is the 90-day overdue rule. A term loan is treated as an NPA if interest or instalment of principal remains overdue for more than 90 days. The triggers vary slightly by facility type:

• Term loan — interest or principal overdue for more than 90 days.
• Cash credit / overdraft — the account is "out of order" (outstanding continuously exceeds the sanctioned limit/drawing power, or no credits for 90 days).
• Bills purchased/discounted — the bill remains overdue for more than 90 days.
• Agricultural advances — overdue for two crop seasons (short-duration crops) or one crop season (long-duration crops).

An important related concept is the Special Mention Account (SMA). An early-warning category before NPA: SMA-0 (overdue up to 30 days), SMA-1 (31-60 days), and SMA-2 (61-90 days). Once the 90-day line is crossed, the account becomes a substandard NPA. Examiners frequently test these exact thresholds, so commit them to memory.

The four asset classification categories

RBI requires every advance to be classified into one of four categories based on risk and the period it has remained non-performing:

• Standard asset — performing; no problem other than normal business risk.
• Substandard asset — NPA for up to 12 months; current net worth and security may be inadequate.
• Doubtful asset — has remained substandard for more than 12 months; recovery is highly questionable.
• Loss asset — identified by the bank, auditors, or RBI inspection as uncollectible, though not yet written off.

The progression is time-driven: an account first turns substandard. Slips to doubtful after 12 months as an NPA, and is marked a loss asset when no realistic recovery is expected. Doubtful assets are further sub-divided (D1 up to one year. D2 one to three years, D3 over three years) because provisioning rises with the age of the doubtful classification. This category-by-time mapping is one of the most reliably examined parts of NPA classification in ABM.

Provisioning norms against each category

Provisioning is the buffer a bank charges to its profit and loss account to absorb expected loan losses. RBI prescribes minimum provisioning percentages that rise with the severity of classification:

The unsecured portion of any doubtful asset attracts 100% provisioning, while the secured portion is provided for at increasing rates as the account ages. These percentages directly reduce reported profit and capital, so banks are highly motivated to recover or upgrade accounts. Remember that NPA classification and provisioning move together: classification decides the percentage, and provisioning translates it into a rupee charge.

Banks may also hold provisions above the regulatory minimum as a prudent buffer. And the difference between gross NPAs and provisions held gives the net NPA figure that analysts watch closely. The Provision Coverage Ratio (PCR) — provisions held as a percentage of gross NPAs — is a key indicator of how well a bank has cushioned itself against bad loans; a higher PCR signals a healthier balance sheet. CAIIB candidates should be able to distinguish gross NPA. Net NPA, and PCR, and explain how aggressive provisioning today protects future profitability even though it depresses current earnings.

An account can be upgraded back to standard only when the entire arrears of interest and principal are paid by the borrower. Not merely part of them. Recovery mechanisms such as the SARFAESI Act. 2002, the Debt Recovery Tribunals, and the Insolvency and Bankruptcy Code, 2016, give banks legal routes to resolve NPAs, while RBI's resolution framework governs the restructuring of stressed assets. Knowing how classification links to these recovery tools rounds out a complete ABM answer on asset quality.

Studying NPA and provisioning for CAIIB ABM

This is a high-scoring, formula-light topic if you memorise the thresholds and category-wise provisioning. Practise numerical questions that ask you to classify an account from a date and compute the provision. Build a strong base with the structured CAIIB course on iibf.store, attempt ABM-focused practice tests, track policy changes through IIBF news, and read more explainers on the iibf.store blog.

Conclusion: Mastering NPA classification, IRAC norms and provisioning gives you a powerful lens on bank health and a reliable source of ABM marks. Lock in the thresholds and percentages, then test yourself with timed questions. Begin now with a CAIIB ABM mock test on iibf.store, or join the full CAIIB course to clear your exam with confidence.