NPA & Prudential Norms for Bank Promotion Exams (IRACP 2025)
NPA & Prudential Norms for Bank Promotion Exams (IRACP 2025)
⚡ Quick Facts — NPA & Provisioning
| Governing framework | RBI Master Circular / IRACP Directions (updated annually, April 1) |
| NPA trigger (loans) | Overdue > 90 days (principal or interest) |
| SMA-0 / SMA-1 / SMA-2 | 1–30 / 31–60 / 61–90 days overdue |
| OD/CC “out of order” | Outstanding > Drawing Power continuously for 90 days |
| Agriculture (short crops) | Overdue for 2 crop seasons |
| Agriculture (long crops) | Overdue for 1 crop season |
| Sub-standard period | NPA for ≤ 12 months |
| Doubtful 1 / 2 / 3 | Substandard for <12 months / 1–3 yrs / >3 yrs |
| Loss asset provisioning | 100% of outstanding |
| Income recognition on NPA | Cash basis only — NOT accrual |
| 2025 key change | Mandatory system-based automated NPA classification — no manual override |
Non-Performing Assets (NPAs) and the Income Recognition, Asset Classification & Provisioning (IRACP) norms are a high-weightage topic at all scales of bank promotion exams — typically 6–10 marks. The 2025 RBI Directions introduced system-driven automation as a critical compliance requirement. Know both the classification logic and the provisioning percentages cold.
The SMA (Special Mention Account) categories — 0, 1, 2 — were formalised and made mandatory under the revised IRACP framework. The old approach of classifying NPA directly at 90 days without the SMA early-warning ladder is no longer current. Exam MCQs routinely test SMA days.
What is an NPA?
A Non-Performing Asset is a loan or advance where:
- Interest and/or principal is overdue for more than 90 days (for most credit facilities)
- The account has ceased to generate income for the bank
Overdue: Any amount due to the bank under any credit facility that is not paid on the due date fixed by the bank.
NPA Classification by Facility Type
| Facility Type | NPA Trigger |
|---|---|
| Term Loan | Interest and/or instalment of principal overdue for >90 days |
| Overdraft / Cash Credit (OD/CC) | Account “out of order” for >90 days (see definition below) |
| Bills Purchased / Discounted | Bill overdue for >90 days |
| Agricultural (short duration crops) | Instalment or interest overdue for two crop seasons |
| Agricultural (long duration crops) | Instalment or interest overdue for one crop season |
| Other accounts | Any amount to be received remains overdue for >90 days |
Out-of-Order — OD/CC Accounts
A CC/OD account is treated as “out of order” if:
- The outstanding balance remains continuously above the sanctioned limit / drawing power for 90 days, OR
- The credit balance is not sufficient to cover interest debited during the last 90 days, OR
- Drawings are permitted based on a stock statement older than 3 months continuously for 90 days
Special Mention Accounts (SMA) — Early Warning
Before a loan becomes NPA, it passes through the SMA ladder — a day-end, system-driven early warning classification:
| Category | Days Overdue | Significance |
|---|---|---|
| SMA-0 | 1 to 30 days | First sign of stress; bank must initiate contact and corrective action |
| SMA-1 | 31 to 60 days | Escalating stress; MSME Resolution framework may kick in |
| SMA-2 | 61 to 90 days | High stress; ICA / resolution plan must be in place before NPA |
| NPA | >90 days | Non-performing; provisioning requirements apply |
Asset Classification — NPA Sub-Categories
Once classified as NPA, assets are further categorised based on how long they have remained non-performing:
| Category | Definition | Characteristics |
|---|---|---|
| Sub-standard | NPA for ≤ 12 months | Credit weakness; inadequate protection; some scope for recovery |
| Doubtful-1 (D1) | Sub-standard for up to 12 months (NPA for 12–24 months total) | Full repayment highly questionable given current condition |
| Doubtful-2 (D2) | Sub-standard for 1–3 years (NPA for 24–48 months) | Recovery increasingly uncertain |
| Doubtful-3 (D3) | Sub-standard for >3 years (NPA for >48 months) | Loss virtually certain; security may have eroded significantly |
| Loss Asset | Loss identified by bank / auditor / RBI inspection; not yet written off | Uncollectible; no longer bankable; 100% provision required |
Provisioning Requirements
| Asset Category | Secured Provision | Unsecured Provision |
|---|---|---|
| Standard (general) | 0.25%–1% (varies by sector) | |
| Sub-standard | 15% | 25% (additional 10% for unsecured) |
| Doubtful-1 (D1) — up to 1 year | 25% | 100% |
| Doubtful-2 (D2) — 1 to 3 years | 40% | 100% |
| Doubtful-3 (D3) — over 3 years | 100% | 100% |
| Loss Asset | 100% | |
Valuation of Security
- NPA accounts with balance ≥ ₹5 crore: stock audit at annual intervals by external agencies
- Immovable property (collateral): valuation every 2 years by Board-approved valuers
Gross NPA vs Net NPA
Gross NPA = all NPA accounts at book value (before provisions)
Net NPA = Gross NPA minus:
- Provisions held against NPAs
- Balance in Interest Suspense Account
- Part payments received in suit-filed accounts kept in Sundry Suspense
- ECGC / CGFMU claims received and held in Sundry Suspense
Income Recognition on NPAs
| Account Type | Basis of Income Recognition |
|---|---|
| Standard Assets | Accrual basis — income booked as it becomes due |
| NPA Accounts | Cash basis only — income booked only when actually received |
| Exception: Advances against term deposits, NSCs, IVPs, KVPs, Life policies | Interest may be taken to income on due date if adequate margin available |
Reversal of Income
When an account becomes NPA for the first time:
- Unrealised interest already booked on accrual basis — for the current year AND the preceding year — must be reversed from P&L
- This applies even to Government-guaranteed accounts
Upgrading NPA to Standard Asset
An NPA can be upgraded to Standard only when:
- All arrears of interest and principal are paid across all credit facilities of the borrower with the bank
- Partial repayment of one facility does not trigger upgrade if other facilities remain NPA
System-Based Classification — 2025 Requirement
The RBI IRACP Directions 2025 (effective April 1, 2025 for banks) mandate:
- All accounts must be covered by an automated IT-based system for asset classification, upgrade, and provisioning
- Day-end, system-driven recognition of overdue status, SMA tagging, and NPA classification
- Asset classification dates must reflect the actual calendar date of delinquency
- No manual override or post-facto adjustment is permitted
Restructured Accounts
- All restructured standard accounts are downgraded to NPA upon restructuring
- MSME accounts with exposure < ₹25 crore: eligible for upgrade after 1 year of satisfactory performance post-restructuring
- Satisfactory performance = regular repayment as per restructured terms
Practice NPA & IRACP MCQs
Provisioning percentages, SMA days, and upgrade conditions are exam staples — often in scenario format. Our course includes 20+ MCQs with explanation of common traps.
View Course Details →One-Liners for Quick Revision
- NPA = any loan where interest/principal is overdue for more than 90 days.
- SMA-0: 1–30 days; SMA-1: 31–60 days; SMA-2: 61–90 days. NPA: >90 days.
- OD/CC is NPA if “out of order” for >90 days — outstanding exceeds drawing power for 90 continuous days.
- Agriculture (short duration crops): NPA if overdue for 2 crop seasons.
- Agriculture (long duration crops): NPA if overdue for 1 crop season.
- Sub-standard: NPA for ≤ 12 months.
- Doubtful-1: Sub-standard for up to 12 months; D2: 1–3 yrs; D3: >3 yrs.
- Provisioning (secured): Sub-std 15% → D1 25% → D2 40% → D3 100%.
- Provisioning (unsecured): Sub-std 25%; D1/D2/D3 all = 100%.
- Loss Asset provisioning: 100% — regardless of security.
- NPA income recognition: cash basis only — not accrual.
- When an account first becomes NPA, unrealised interest from current + previous year must be reversed.
- Net NPA = Gross NPA − provisions − Interest Suspense − part payments in suspense − ECGC/CGFMU claims in suspense.
- NPA upgrade requires clearing arrears across ALL credit facilities of the borrower — not just one account.
- Loss Asset ≠ written-off; it is identified as a loss but may still be on the books.
- SMA and NPA classification is borrower-wise — not account-wise.
- From 2025, NPA classification is system-driven — no manual override permitted.
- Valuation of immovable collateral for NPAs ≥ ₹5 crore: every 2 years by Board-approved valuers.
Frequently Asked Questions
What is the 90-day NPA rule and how does it apply to different loan types?
A loan is classified as NPA (Non-Performing Asset) if interest or principal remains overdue for more than 90 days. For term loans and bills, this is straightforward. For OD/CC accounts, the trigger is being “out of order” — i.e., the outstanding balance exceeding the drawing power — for 90 continuous days. Agricultural loans have a different standard: 2 crop seasons for short-duration crops, 1 crop season for long-duration crops.
What are the SMA categories and what days overdue do they cover?
Special Mention Accounts (SMA) are early warning categories for stressed loans: SMA-0 covers 1 to 30 days overdue; SMA-1 covers 31 to 60 days overdue; SMA-2 covers 61 to 90 days overdue. Beyond 90 days, the account becomes NPA. SMA classification is system-driven (day-end) and borrower-wise — all facilities of a borrower are tagged at the same SMA level.
What are the provisioning rates for NPA assets — sub-standard, doubtful, and loss?
Provisioning rates: Sub-standard secured: 15%, unsecured: 25%. Doubtful-1 (up to 1 year): secured 25%, unsecured 100%. Doubtful-2 (1–3 years): secured 40%, unsecured 100%. Doubtful-3 (over 3 years): 100% for both. Loss assets: 100% regardless of security. The escalating secured rate — 15, 25, 40, 100 — is the most commonly tested sequence.
How is income recognised on NPA accounts?
Income on NPA accounts is recognised on a cash basis only — interest is booked only when actually received, not on accrual. When an account becomes NPA for the first time, all unrealised interest already taken to P&L on accrual basis — for the current year as well as the preceding year — must be reversed. This reversal applies even to Government-guaranteed accounts.
What are the conditions to upgrade an NPA account back to standard?
An NPA can be upgraded to standard status only when all arrears of interest and principal are paid off across all credit facilities of that borrower with the bank. Partial repayment of one account is not enough — if the borrower has three loan accounts and pays one fully, the other two remain NPA and the paid one does not automatically upgrade. Since 2025, upgrade recognition is system-driven and requires no manual intervention.
What changed about NPA classification under the RBI IRACP Directions 2025?
The RBI IRACP Directions 2025 (effective April 1, 2025 for banks) mandated fully automated, system-driven NPA classification at day-end. All accounts must be covered by an IT-based system for SMA tagging, NPA classification, upgrade, and provisioning. Asset classification must reflect the actual calendar date of delinquency, and no manual override or post-facto adjustment is permitted. This eliminates the earlier practice of branch-level discretion in NPA recognition.
Continue Your Bank Promotion Preparation
These topics are tested alongside NPA & Prudential Norms (IRACP) — cover them before your exam.