What changed
RBI consolidated and updated income recognition, asset classification, and provisioning (IRAC) norms specifically for Local Area Banks (LABs) under a single direction effective November 28, 2025. The new direction replaces earlier fragmented instructions and introduces clearer definitions for terms like 'doubtful asset' (12 months in substandard), 'out of order' (90-day excess), and 'loss asset'. It also mandates board-level oversight, prudential lending guidelines, and enhanced disclosure requirements.
What it means for you
LABs must now follow a unified IRAC framework, reducing ambiguity in asset classification and provisioning. The 12-month downgrade period for doubtful assets aligns with standard norms, impacting provisioning timelines. Banks need to review their loan monitoring systems to ensure timely NPA recognition and provisioning, especially for cash credit/overdraft accounts.
What you must do
- Update internal IRAC policies to align with the new definitions and timelines, especially for 'out of order' and 'doubtful asset'.
- Train credit and risk teams on the revised NPA classification criteria and provisioning requirements.
- Enhance board-level reporting on asset quality and compliance with the new disclosure norms.
- Review existing loan accounts for reclassification under the updated 'out of order' and 'doubtful asset' definitions.
Who it affects
Local Area Banks (LABs), Credit and risk management teams at LABs, Board of Directors of LABs, Auditors and compliance officers
What is the new definition of 'doubtful asset' under these directions?
An asset that has remained in the substandard category for a period of twelve months is now classified as a doubtful asset.
When do these directions take effect?
The directions came into force with immediate effect from November 28, 2025.
Are these directions applicable to all banks?
No, these directions are specifically applicable only to Local Area Banks (LABs).