Provisioning Norms
RBI's provisioning norms, governed by the Income Recognition, Asset Classification and Provisioning (IRAC) framework, specify the minimum percentage of a loan's outstanding amount that a bank must set aside as a provision depending on the NPA category — Sub-Standard, Doubtful, or Loss — and the type of collateral held.
The IRAC framework, consolidated in RBI's Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, forms the bedrock of credit risk management in Indian banking. A loan becomes NPA when interest or principal remains overdue for more than 90 days (for term loans) or 30 days (for agricultural loans). Once classified as NPA, the loan progresses through three sub-categories based on the duration it has been NPA.
Sub-Standard assets are those that have remained NPA for less than or up to 12 months. Banks must maintain a general provision of 15% of outstanding amount on secured sub-standard assets and 25% on unsecured sub-standard assets. Once a loan is classified sub-standard, income recognition ceases — interest accrued is credited to a suspense account rather than the profit and loss account.
Doubtful assets are those that have remained in the sub-standard category for more than 12 months. Provisioning requirements increase with the duration in the doubtful category: Doubtful 1 (12-24 months) requires 25% on secured portions and 100% on unsecured portions; Doubtful 2 (24-36 months) requires 40% secured, 100% unsecured; Doubtful 3 (above 36 months) requires 100% on both secured and unsecured portions. The secured portion refers to the realisable value of tangible collateral.
Loss assets are accounts where the loan is considered uncollectible and of little value as a realisable asset, even though some recovery may be possible eventually. A 100% provision is required on loss assets. In practice, once classified as loss, banks may write off the loan (remove from the balance sheet) while maintaining the provision, though recovery efforts continue.
Beyond these IRAC-mandated provisions, RBI periodically requires banks to hold additional provisions for specific stressed sectors — such as the 10% provision on standard assets for certain telecom and real estate exposures, and the additional provisions required during COVID-19 for borrowers under moratorium. The Provisioning Coverage Ratio (PCR), which measures provisions as a proportion of gross NPAs, is monitored closely as an indicator of the adequacy of provisioning buffers.