RBI IRAC Norms Decoded: SMA, NPA and Upgradation

TL;DR

• Since 28 November 2025, the RBI Commercial Banks IRAC Directions, 2025 govern how your loan is classified. The 2015 Master Circular is now history.
• Overdues age in fixed bands: SMA-0 at 1 to 30 days, SMA-1 at 31 to 60, SMA-2 at 61 to 90. Day 91 is the NPA line.
• Classification is borrower-wise, not facility-wise. Security and net worth do not keep a defaulting account standard. Only full payment of arrears upgrades it.

Every borrower has heard the word NPA. Fewer know the clock that runs before it. That clock starts on the due date your bank fixed. It ticks in 30-day bands, it runs at day-end without manual intervention, and on day 91 it changes what your loan costs and whether you can borrow again. This guide decodes that clock in plain words.

One warning. Banking pages often quote the old Master Circular as if it still governs. It does not. The November 2025 Directions govern today, and this guide leads with them.

What did the RBI actually change in November 2025?

On 28 November 2025, RBI replaced hundreds of legacy instructions with one consolidated set of IRAC Directions for commercial banks, effective immediately.

The instrument is the Reserve Bank of India (Commercial Banks: Income Recognition, Asset Classification and Provisioning) Directions, 2025, issued as RBI/DOR/2025-26/164 on 28 November 2025. It consolidates 238 legacy Master Directions, circulars and instructions into a single rule book. Inside that consolidation sits the old Master Circular on prudential norms, RBI/2015-16/101, DBR.No.BP.BC.2/21.04.048/2015-16, dated 1 July 2015. That circular is now lineage, not law. The 2025 Directions are the current rule.

The definitions, the 90-day line and the provisioning percentages will feel familiar to anyone who worked under the Master Circular. What the consolidation adds is a single home for the automation discipline: flagging happens as part of the day-end process for the due date, with no manual intervention. A branch cannot quietly hold a file back from the SMA list.

The longer history helps you read old files. RBI introduced the IRAC norms in 1992, on the Narasimham Committee recommendations, and the old Health Code system of subjective asset grading ended. The recognition norm then tightened in steps, from four quarters of overdue to the present 90 days, with the 90-day norm in place by 31 March 2004. The 2015 Master Circular consolidated a decade of instructions. The November 2021 clarifications fixed two points lenders had applied unevenly: classification runs on the day-end position, and an NPA upgrades only when every arrear is cleared. The November 2025 Directions now consolidate all of it. An old citation explains the past. It does not govern the present.

What does IRAC stand for, and why should a borrower care?

IRAC stands for Income Recognition, Asset Classification and Provisioning: the three rules that decide when a bank may book interest, how it labels your loan, and how much money it must set aside against it.

Income recognition is the first leg. A bank may take interest to income only when the record of recovery supports it. Once an account becomes an NPA, interest already charged and not realised is reversed, and further interest stays in a memorandum record until cash arrives. Asset classification is the second leg. Every advance sits in one bucket: standard, or, if it stops performing, substandard, doubtful or loss. Provisioning is the third leg. Against each bucket the bank sets aside a fixed share of your outstanding, a real cost in its profit and loss account.

Borrowers meet IRAC through four definitions, stated in Chapter I of the 2025 Directions. An NPA is an asset, including a leased asset, which has ceased to generate income for the bank. An amount is overdue if it is not paid on the due date fixed by the bank. A substandard asset is one that has remained an NPA for a period less than or equal to 12 months. A doubtful asset is one that has remained in the substandard category for a period of 12 months. A loss asset is one where loss has been identified by the bank, by its auditors or by RBI inspection, but the amount has not been written off wholly. Each label turns on days and on payment, not on opinion.

Three principles then do the heavy lifting. First, classification is borrower-wise, not facility-wise. If you have two facilities and one turns non-performing, the bank reads you, the borrower, through that lens. Second, the availability of security, or the net worth of the borrower or the guarantor, does not justify treating an advance as standard. Good collateral changes the bank loss, not the label. Third, temporary deficiencies do not by themselves justify a standard label either. The classification follows the record of recovery, and that record is what a later credit appraisal memorandum must explain.

When does your account become SMA-0, SMA-1, or SMA-2?

Your account enters SMA-0 as soon as principal or interest, or any other amount, stays wholly or partly overdue, and it then ages by days overdue: SMA-0 up to 30 days, SMA-1 beyond 30 and up to 60 days, SMA-2 beyond 60 and up to 90 days.

SMA means Special Mention Account, the early-warning shelf before the NPA shelf. The bands come from the stressed-assets framework, carried forward in the Stressed Assets Directions and the Master Circular lineage. A partly paid instalment still counts. A small interest shortfall still counts. The count is of days, not of rupees, so a shortfall of a few hundred rupees ages exactly like a shortfall of a few lakh. The account is flagged as overdue as part of the day-end process for the due date, irrespective of the time that process runs, and the 2025 Directions keep manual intervention out of that flagging.

Two points keep SMA honest. First, SMA is not NPA. An SMA account is still a standard asset, and the flag exists even while the account is standard. Second, the framework carries a balance-sheet-date carve-out in its lineage: an account that slipped into SMA-2 during the year but was fully regularised before the balance-sheet date is not carried forward as SMA-2 in that balance sheet. Read that as a reporting carve-out in the framework, not as a licence to slip every March and cure every March. The day-to-day stamps still happened, and the bank statement still shows them. That statement is where the ageing first becomes visible, which is why officers read it so closely, as our guide to what credit officers look for in a bank statement sets out.

When does SMA-2 become an NPA?

SMA-2 becomes an NPA when the overdue period crosses 90 days, so day 91 is the line: for a term loan, interest or an instalment of principal overdue beyond 90 days makes the loan non-performing.

The term-loan test is the one most borrowers meet. Interest, an instalment of principal, or both, remain overdue for more than 90 days. Bills turn non-performing the same way, when they stay overdue beyond 90 days, and the Directions list parallel triggers for derivatives, securitisation liquidity facilities and crop loans, where the crop-season rule replaces the 90-day count. For a normal business term loan, keep the simple picture: three missed monthly cycles, read at day-end, and the account is an NPA.

Cash credit and overdraft accounts use a different gate with the same length. A CC or OD account is out of order, and therefore non-performing, if any one of three things holds. The outstanding balance stays continuously above the sanctioned limit or the drawing power for 90 days. Or the balance stays within the limit but there are no credits at all for 90 days continuously. Or credits do come in during the previous 90 days but they are not enough to cover the interest debited in that period. Any single limb is enough. A trader who routes sales receipts to another bank can trip the second limb. A seasonal business that credits lump sums twice a year can trip the third. The test reads the behaviour of the account, not the intention of the borrower.

The NPA stamp then follows the borrower, not the facility. A proprietor with a term loan and a cash credit limit cannot keep one facility clean by starving the other. If either facility crosses its line, the classification conversation covers the whole relationship. That is why the last 30 days of SMA-2 deserve more urgency than the first 30 days of SMA-0. There is one more NPA gate that has nothing to do with overdue days: if your cash credit limit is not reviewed or renewed within 180 days of its due date, the account turns NPA on that count alone. The borrower's renewal playbook walks the whole renewal cycle, from the due date to the four outcomes.

Substandard, doubtful, loss: what changes at each step?

The label changes with time spent as an NPA: substandard for the first 12 months, doubtful once the account has completed 12 months in substandard, and loss when the bank or its auditors identify the amount as uncollectable but have not written it off wholly.

Substandard is the entry bucket. The asset carries clear credit weaknesses, and the bank accepts that some loss is possible if those weaknesses are not corrected. Income recognition has already stopped, so interest sits in a memorandum record and reaches income only when cash is realised. Doubtful is the same weakness, aged. Collection in full has become highly questionable on the facts the bank knows. Loss is the last label before write-off. The bank, its internal or external auditors, or an RBI inspection has identified the loss.

Notice what does not appear in that table: the value of your security. At no step does strong collateral pull the label back. The 2025 Directions repeat the long-standing position that the availability of security or net worth must not be taken into account when treating an advance as an NPA or otherwise, outside narrow stated exceptions. Collateral decides how much the bank may finally lose. Time and payment decide what the account is called.

How is provisioning calculated, and who pays for it?

The bank sets aside a fixed percentage of your outstanding as a provision, the percentage rises as the account ages from standard to loss, and no deduction is allowed for DICGC or ECGC cover or for a government guarantee when that percentage is computed.

Even a performing loan carries a small provision. Direct agriculture and SME advances carry 0.25 percent. Commercial real estate carries 1.00 percent, commercial real estate in the residential housing segment carries 0.75 percent, teaser-rate housing loans carry 2 percent, and all other standard advances carry 0.40 percent. On a ₹50 lakh loan in the residual category, that standard provision is ₹20,000.

The numbers change character once the account turns. A substandard account attracts 15 percent on the secured portion, with an additional 10 percent on the unsecured portion, so an unsecured exposure is provided at 25 percent in total. Take the same ₹50 lakh, fully secured by tangible security with a realisable value that covers it. The substandard provision is ₹7,50,000. If that same ₹50 lakh were unsecured, the provision would be ₹12,50,000. A doubtful account then climbs a ladder. On the secured portion, doubtful-1 takes 25 percent, doubtful-2 takes 40 percent, and doubtful-3 takes 100 percent. The unsecured portion of a doubtful account takes 100 percent at every doubtful band. On our fully secured ₹50 lakh, that is ₹12,50,000 in doubtful-1, ₹20,00,000 in doubtful-2 and the full ₹50,00,000 in doubtful-3. A loss asset takes 100 percent, by write-off or by provision, and a loss asset that stays on the books must be written off within four years. The workbook with this article replays each figure as a live formula on the same ₹50 lakh.

Who pays for that provision? In the bank ledger, the bank pays, out of its profit. In your next negotiation, you pay. A provision-heavy book prices fresh loans higher and renews stressed limits lower. Collateral haircuts matter only at the recovery end. Under the reading that lenders and law firms apply today, haircuts on collateral values belong to the Insolvency and Bankruptcy Code, 2016 valuation process. Treat that as an interpretation of how recovery values are taken, not as an IRAC percentage. Keep one draft out of planning: RBI published an expected credit loss framework as a draft on 7 October 2025. Provisioning today still runs on the IRAC percentages in the 2025 Directions, and any floor quoted from that draft is not a binding rule for your loan.

Can an NPA go back to standard?

Yes, an NPA can return to standard, but only when the borrower pays the entire arrears of interest and principal; part payment, however large, does not upgrade the account.

The rule is all or nothing, and the 2021 clarifications closed the softer practice that sat before it. Lenders had upgraded accounts on payment of interest alone, or on part of the overdue. The clarification, carried into the 2025 Directions, allows upgrade only on repayment of the entire arrears. Classification and upgrade both run on the day-end position, so the payment must be realised and stamped at day-end.

Borrowers with more than one facility face the wider version of the same rule. Regular and ad-hoc limits must both be regularised. If either the regular limit or the ad-hoc limit stays out of order, the whole exposure stays non-performing. Paying the term loan in full while the cash credit account runs above drawing power leaves the borrower classified. Clear every facility and every arrear as one set. Restructuring is stricter again. A restructured account keeps its existing classification unless it performs satisfactorily through the specified period of one year. Signing a restructuring package starts that year. It does not end the NPA label.

The upgrade changes the label. It does not erase the history. Your statement will still show the overdue months, your bureau record will still show the delay, and the next appraiser will still ask what caused the slip and what has changed since. Treat the upgrade as two tasks: clear every arrear in full, and build the paper trail that explains the slip.

What should your CAM note say about SMA history?

Your CAM note should state the worst SMA band touched in the last 12 months, the peak days overdue, the date every arrear was cleared, and the cash-flow reason the slip will not repeat.

Appraisers do not fear an SMA history. They fear an unexplained one. A short SMA-0 with a named cause, a late receivable from a named debtor, reads as a working-capital event. Three silent SMA-2 prints read as a habit. Write the note so an officer who has never met you can follow the account month by month. The CAM pillar guide shows where this paragraph sits inside the full appraisal, and the bank statement guide shows the statement lines the officer will cross-check it against.

• Name the band and the dates. Worst band, first overdue date, regularisation date.
• Tie the cause to cash flow, not character. A delayed customer payment with the invoice and the later credit beats a general promise.
• Show the cover after the slip. Recompute repayment capacity on current numbers. Our DSCR guide gives the computation officers use.
• Keep limits inside drawing power. A CC slip often starts as a drawing power breach. The drawing power guide shows the monthly discipline.
• Keep stock and debtors verifiable. If the slip touched stock statements, say what the last stock audit found and what changed after it.
• Close the loop on monitoring. Banks escalate statement signals through their warning stack. The early warning playbook maps that escalation.

Bring the day counter with this article to that conversation. Enter your days overdue, your outstanding and your security value, and the workbook shows your current band, the day-91 line and the provision at each stage on your own numbers. A borrower who walks in knowing his exact band, his exact arrear and his exact regularisation date is already answering the first three questions in the note.

Sources

• RBI (Commercial Banks: Income Recognition, Asset Classification and Provisioning) Directions, 2025: RBI/DOR/2025-26/164, 28 November 2025, immediate effect. Governing instrument today.
• RBI Master Circular: Prudential norms on Income Recognition, Asset Classification and Provisioning: RBI/2025-26/13, 1 April 2025. Predecessor lineage, including the 2015 Master Circular RBI/2015-16/101. Lineage, not current law.
• RBI Stressed Assets Directions, 2025 (SMA categories): SMA-0 up to 30 days, SMA-1 beyond 30 and up to 60 days, SMA-2 beyond 60 and up to 90 days.
• RBI IRAC Clarifications: DOR.STR.REC.68, 12 November 2021, with DOR.STR.REC.85, 15 February 2022. Day-end classification; upgrade only on entire arrears.

The collateral-haircut point in the provisioning section is marked in the text as an interpretation under the Insolvency and Bankruptcy Code, 2016. It is not stated as an IRAC rule.

Frequently Asked Questions

Last updated: October 2026. Classification and provisioning percentages are from the 2025 Directions cited above. Worked-example figures are illustrative. Your sanction letter and your bank day-end record decide your account.