NPA Classification, Provisioning and Recovery: CAIIB ABM Guide

NPA classification and provisioning is one of the highest-yielding topics in the CAIIB Advanced Bank Management (ABM) paper, and for a simple reason: asset quality drives a bank's profitability, capital adequacy and standing with the regulator. If you can date the exact day an account turns bad, slot it into the right category and apply the correct provisioning slab, you have already locked up a cluster of near-certain marks. This guide rebuilds the entire topic from first principles so that the numericals feel automatic on exam day.

Throughout your revision for the CAIIB exam, treat these rules as definitions to be quoted verbatim, not paraphrased. Examiners reward precision here, and a single misremembered date or percentage can flip a numerical answer.

What Makes a Loan an NPA Under IRAC Norms

The foundation of NPA classification and provisioning is the Reserve Bank of India's Income Recognition and Asset Classification (IRAC) framework. An advance becomes a Non-Performing Asset (NPA) the moment it stops generating income for the bank. The governing trigger is the famous 90-day rule.

The way the rule applies depends on the type of facility:

• Term loans: NPA if interest or a principal instalment remains overdue for more than 90 days.
• Cash credit / overdraft: NPA if the account is "out of order" for more than 90 days — the balance continuously exceeds the sanctioned limit or drawing power, or there are no credits for 90 days, or credits are insufficient to cover the interest debited.
• Bills purchased or discounted: NPA if they remain overdue for more than 90 days.
• Agricultural advances: the test shifts to crop seasons — two crop seasons for short-duration crops and one crop season for long-duration crops.

Two principles tie this together. First is the borrower-wise classification rule: if any one facility of a borrower turns NPA, every facility of that borrower is classified as NPA, because the bank assesses the borrower, not the individual account. Second is the income-recognition discipline: once an asset is non-performing, the bank cannot book interest on an accrual basis — income is recognised only on actual realisation. These two rules quietly decide many exam numericals, so commit them to memory.

The Four Asset Classification Categories

RBI requires banks to place every advance into one of four buckets that reflect rising credit risk. Getting these definitions exact is non-negotiable for the ABM paper.

• Standard Asset: a performing account that carries only normal business risk. It is the only category that is not an NPA.
• Sub-Standard Asset: an account that has remained an NPA for a period up to 12 months. Security may be inadequate, and the bank could sustain some loss if the deficiencies are not corrected.
• Doubtful Asset: an account that has stayed in the sub-standard category for 12 months — that is, it has been an NPA for more than 12 months. Full collection is highly questionable and improbable.
• Loss Asset: an account where loss has been identified by the bank, its auditors or an RBI inspection, but the amount has not yet been fully written off. It is treated as uncollectible.

The deterioration path is time-driven and one-directional: a Standard asset becomes Sub-Standard at the 90-day mark, Sub-Standard becomes Doubtful after a further 12 months, and continued erosion of security pushes an account towards Loss. Upgradation back to Standard is permitted only when the entire arrears of interest and principal have been paid by the borrower — partial recovery does not upgrade the account. For a wider view of how this slots into the syllabus, the Advanced Bank Management module maps each sub-topic to its weightage.

Provisioning Requirements You Must Memorise

Provisioning is the cushion a bank charges to its profit and loss account against an expected loss. The percentage depends on the category and, for NPAs, on whether the exposure is secured or unsecured. The table below is the heart of this topic — learn it cold.

A few points worth underlining. The unsecured portion of any doubtful asset is always provided at 100%, regardless of how long it has been doubtful. The secured portion climbs with age — 25%, then 40%, then 100% — because the longer recovery drags on, the less the security is worth. Banks also track a Provision Coverage Ratio (PCR), the aggregate of provisions as a proportion of gross NPAs, which RBI monitors as an asset-quality buffer.

Note the regulator-set nature of these slabs. Sensitive-sector rates such as commercial real estate are revised from time to time, so for any borderline figure always confirm against the latest released RBI master circular rather than an old number. You can rehearse the slabs under timed conditions with the CAIIB mock tests built around these exact percentages.

SMA Categories: The Early-Warning System

Before an account ever crosses the 90-day line, RBI requires banks to flag stress through the Special Mention Account (SMA) framework. These categories are reported to the Central Repository of Information on Large Credits (CRILC) and act as an early-warning system. For loans other than revolving facilities, the buckets are defined by how many days the principal or interest is overdue:

• SMA-0: principal or interest overdue for 1 to 30 days, or other signs of incipient stress.
• SMA-1: overdue for 31 to 60 days.
• SMA-2: overdue for 61 to 90 days. Beyond 90 days, the account becomes an NPA.

For cash credit and overdraft, SMA-1 and SMA-2 are based on the account remaining continuously out of order for 31 to 60 days and 61 to 90 days respectively. Crucially, RBI mandates day-end classification: an account that is overdue at the close of a business day is tagged that very day. Spotting stress at the SMA stage gives a bank room to restructure, follow up or tighten monitoring before the account crystallises as an NPA — the link that the ABM paper expects you to draw between credit monitoring and asset classification.

Recovery Mechanisms: SARFAESI, DRT, IBC and OTS

Once an account is an NPA, the bank turns to a layered recovery toolkit. Each mechanism has a clear scope, and the exam loves asking you to compare them.

• SARFAESI Act, 2002: lets a secured creditor enforce security without court intervention. The bank issues a 60-day demand notice under Section 13(2) and, if unpaid, takes possession of the secured asset under Section 13(4) to sell it. It applies to secured exposures above the prescribed threshold and excludes agricultural land.
• Debt Recovery Tribunal (DRT): set up under the RDDBFI Act, 1993, it adjudicates recovery suits for debts above the notified amount and issues recovery certificates. Appeals lie to the Debt Recovery Appellate Tribunal (DRAT).
• Insolvency and Bankruptcy Code (IBC), 2016: a time-bound resolution route through the National Company Law Tribunal (NCLT). A financial or operational creditor can trigger the Corporate Insolvency Resolution Process (CIRP), targeting resolution within 180 days, extendable to 330 days.
• One-Time Settlement (OTS): a negotiated compromise where the bank accepts part of the dues as full and final settlement under a board-approved policy — useful where litigation would be slow or costly.
• Lok Adalats: a quick, low-cost forum typically used for smaller accounts.

Choosing the right tool depends on the security available, the borrower type and the size of the exposure. A small, unsecured retail default may head to a Lok Adalat or OTS; a large secured corporate account may move through SARFAESI and then the IBC. For a deeper dive into the litigation route, our guide on Debt Recovery Tribunals and the DRT process pairs perfectly with this chapter, while the NPA management under Basel III guide connects asset quality to capital.

A Practical Study Plan for This Topic

Theory alone will not carry you through the numericals. Use this short, repeatable plan in the weeks before the exam:

1. Day 1 — anchor the triggers: write the 90-day rule for each facility type and the agriculture crop-season norms from memory until you can reproduce them error-free.
2. Day 2 — drill the categories: practise dating accounts as they move Standard → Sub-Standard → Doubtful, paying attention to the 12-month boundary.
3. Day 3 — master provisioning: redraw the provisioning table by hand and solve mixed secured/unsecured problems.
4. Day 4 — SMA and recovery: memorise the SMA day-ranges and build a one-line comparison of SARFAESI vs DRT vs IBC vs OTS.
5. Day 5 — test yourself: attempt a full timed set and review every wrong answer.

Reinforce the definitions between study blocks with quick recall drills on the CAIIB matching game, and skim the rest of the syllabus through the full CAIIB guide library so the topic sits in context.

Common Mistakes to Avoid

• Confusing 90 days with three months. The norm is days overdue, not calendar months — date it precisely.
• Forgetting borrower-wise classification. One bad facility drags every facility of that borrower into NPA.
• Mixing up the doubtful slabs. Remember the secured portion is 25% / 40% / 100% by age, while the unsecured portion is always 100%.
• Assuming partial payment upgrades an account. Upgradation needs the entire arrears cleared.
• Treating SMA as a sub-set of NPA. SMA is the pre-NPA stress stage; an SMA-2 account is still standard until day 91.
• Applying SARFAESI to agricultural land. It is expressly excluded.

Frequently Asked Questions

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

A term loan becomes an NPA when interest or a principal instalment stays overdue for more than 90 days. A cash credit or overdraft account becomes an NPA when it remains out of order for more than 90 days. For agriculture, the test is two crop seasons for short-duration crops and one crop season for long-duration crops.

What is the difference between a sub-standard and a doubtful asset?

A sub-standard asset has been an NPA for a period up to 12 months. Once it remains sub-standard for a further 12 months — meaning it has been an NPA for more than one year — it is reclassified as a doubtful asset, where full recovery is highly improbable. The shift is driven purely by the passage of time, not by a fresh default.

How much provisioning is required on a loss asset?

A loss asset requires 100% provisioning of the entire outstanding amount. RBI treats the asset as uncollectible, so the bank must provide for the full value even though the amount has not yet been written off the books. This is the heaviest provisioning burden in the framework.

What are the SMA-0, SMA-1 and SMA-2 categories?

They are early-warning buckets for stressed accounts that are not yet NPAs. SMA-0 covers 1 to 30 days overdue, SMA-1 covers 31 to 60 days, and SMA-2 covers 61 to 90 days. Beyond 90 days the account is classified as an NPA. These are reported to CRILC and tagged on a day-end basis.

How does SARFAESI differ from the IBC for recovery?

SARFAESI lets a secured creditor enforce security and take possession without going to court, after a 60-day notice under Section 13(2). The IBC is a tribunal-driven, time-bound corporate insolvency process before the NCLT that can be triggered by a financial or operational creditor and aims to resolve or liquidate the company within 180 to 330 days.

Can an NPA account be upgraded back to a standard asset?

Yes, but only when the borrower pays the entire arrears of interest and principal. A partial recovery or a few regular instalments do not upgrade the account. Because the provisioning percentages and figures here are set by the regulator, always confirm any borderline number against the latest released RBI master circular before relying on it.

Conclusion

Master the 90-day trigger, the four asset categories, the exact provisioning slabs, the SMA early-warning buckets and the SARFAESI-DRT-IBC-OTS recovery ladder, and you have turned one of the toughest ABM areas into a reliable source of marks. This topic rewards precise recall and confident numerical work, so practise dated classification problems until they feel second nature. Keep going — every clean, well-dated answer here lifts your overall ABM score. For the official position, you can always cross-check on the IIBF website.

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