Income Recognition and Asset Classification Norms (IRAC) : - by CA KVS Shyamsunder

Income Recognition and Asset
Classification Norms (IRAC)
- By CA KVS Shyamsunder
What is a Non- Performing Asset?
a) As asset including a leased asset, becomes non- performing when it ceases to
generate income for the Bank.
b) A non-performing asset is a loan/or an advance where:

1) Interest and /instalment of Principal remains overdue for a period of more
than 90days in respect of a Term Loan.
2) The account remains out of order in respect of overdraft/cash credit.
3) The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted.
4) Interest /instalment of Principal remains overdue for two crop seasons for
short duration crops.
5) Interest/instalment of Principal remains overdue for one crop season for long
term crops.
6) Amount due to Bank under any facility is overdue for a period of more than
90 days.
7) Account where regular/adhoc credit facilities have not been renewed
/reviewed within 180 days from the due date /date of sanction.
c) Overdue
Any amount due to the Bank under any facility is overdue if it is not paid on the
due date fixed by the Bank.
1) In the case of temporary overdraft, the outstanding will not be overdue up to
7 days. Hence the temporary overdraft if remaining outstanding for more
than 7 days only should be reported as overdue.
2) in the case of excess over sanctioned limit/drawing power the accounts
become overdue from the date of such excess.
3) in the case of Term loans and loans repayable on demand the instalments
become overdue from the due date of instalments.
4) interest due and charged remaining unadjusted becomes overdue from the
last day of the quarter irrespective of interest charged at monthly intervals.
5) A bill becomes overdue from its due date. In case of sight bills they become
overdue if it remains unpaid on presentation.
d) Out of Order status
1. An account should be treated as out of order if:
a) the outstanding balance remains continuously in excess of the sanctioned
limit /drawing power.
b) where the outstanding balance in the principal operating account is less
than the sanctioned limit/drawing power, but there are no credits
continuously for 90 days as on date of Balance sheet or credits are not
enough to cover the interest debited during the same period.
Software Package:
• Various types of software package used by Banks on CBS platform
automatically generate the report on classification of advances based on
RBI norms.
• Manual intervention by Bank staff for identification and classification is

not normally permitted in such software package.
• Although Banks have switched over to system driven classification of

advances it is absolutely necessary for the auditors to verify each and
every account for its correct classification as per IRAC norms and do not
give any scope to the Statutory auditors for issuing MOC and reversal of
income.
• Verification of appropriate classification of advances and accordingly

appropriate accounting of income and other charges forms very important
part of audit.
• Other aspects
a) Solitary or few credits before the Balance sheet date.
b) Cheque discounting/ additional facilities granted to recover critical
amount.
• Asset classification is borrower wise and not facility wise.
• Outstandings in devolved L/Cs / invoked B/G if parked in a

separate account, same should be clubbed with o/s in CC
account for determining asset classification.
• Percolated NPA/ NPI – (Treasury operations)

• Government guaranteed accounts: Such accounts are classified as NPA
only if the Central Government repudiates its guarantee when invoked.
This exemption is not available to accounts backed by State Government
Guarantees.
• Consortium Accounts: Classification of such advances should be based on

record of recovery by each member Bank. Status of the account with Lead
bank will not be the criteria.
• Advance against Term Deposits/ NSC/ KVP/ : Such advances are

exempted from NPA norms provided adequate margin is available in the
accounts. Advance against gold ornaments/ Government securities are not
exempted.
• Net worth of borrower/ guarantor or availability of Security: Since income

recognition is based on recoveries, net worth of the borrower/ guarantor is
irrelevant for the purpose of treating its account as NPA or otherwise
• Advances to Staff: Interest bearing advances should be included as part of
advance portfolio. In case of Loans/advances granted to staff members
where interest is payable after recovery of principal, interest need not be
considered as overdue from the 1st quarter onwards.
• Income Recognition:
• Internationally income from NPA is not recognized as income on accrual
base but is booked as income only when it is actually received.
• On the account turning NPA branch should reverse the interest already
charged and not collected by debiting P&L account and stop further
application of interest. However the same should be recorded in Dummy
Ledger.
• Interest on advances against Term Deposits ,KVP,LIC etc may be taken to
income on due date provided adequate margin is available.
• In the case of Govt guaranteed accounts turning NPA interest on such
advances should not be taken to income unless the interest is realized
• Appropriation in NPA Accounts: Appropriation is done normally as per the

internal policy of each Bank/ AS 9.As per RBI guidelines ,Banks are
required to adopt an accounting policy and exercise the right of
appropriation in a uniform and consistent manner
• Classification of Advances:
o Standard
o Sub-standard
o Doubtful assets
o Loss Assets
• Classification is meant for the purpose of computing the amount of

provision to be made in respect of advance.
• Up gradation of Loan accounts earlier classified as NPA.
• If all arrears of interest and principal are paid by the borrower in the
case of NPA accounts, such accounts may be upgraded as standard.
It should be ensured that no additional facility/excess/adhoc is
permitted to regularise the arrears.
• Provisioning for Loans and Advances (RBI Circular 2014)
Classification Provision
A) Standard Assets 0.25% (SME)
1.00% (CRE)
0.75% (CRE – Residential Housing)
0.40% others
Restructured Accounts classified as Standard will attract higher provision

(3.50% - 5.00%)
B) Sub-standard Assets 15% (Secured)
25% (Unsecured)
C) Doubtful Assets
Upto 1 Year 25%
More than 1 year upto 3 years 40%
More than 3 years 100%
D) Loss Assets 100%

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Income Recognition and Asset

Classification Norms (IRAC)

b) A non-performing asset is a loan/or an advance where:

• Manual intervention by Bank staff for identification and classification is

• Although Banks have switched over to system driven classification of

• Verification of appropriate classification of advances and accordingly

• Asset classification is borrower wise and not facility wise.

• Outstandings in devolved L/Cs / invoked B/G if parked in a

• Percolated NPA/ NPI – (Treasury operations)

• Consortium Accounts: Classification of such advances should be based on

• Advance against Term Deposits/ NSC/ KVP/ : Such advances are

• Net worth of borrower/ guarantor or availability of Security: Since income

• Appropriation in NPA Accounts: Appropriation is done normally as per the

• Classification is meant for the purpose of computing the amount of

• Up gradation of Loan accounts earlier classified as NPA.

Restructured Accounts classified as Standard will attract higher provision

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