Reserve Bank of India (Local Area Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 (Updated as on July 1, 2026)
UR
- Applies toLocal area banks
- StatusIn force
- ImportanceMUST READ
- IssuedNov 28, 2025
- Last amendedJul 16, 2026 · 2 incorporated
- Length47 points in 5 sections · 4 min read
The four dates on this rule
- PublishedNov 28, 2025The day RBI put this document out.
- Starts to applyNot statedNot stated separately in this document. Read the rule itself before you assume a start date.
- Time to get readyNot statedCannot be worked out until the day it starts to apply is known.
- Last date to actNot statedNo date to act by was found in this document. Other dates may sit inside single paragraphs.
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Numbers to remember
| 12 months | A doubtful asset is one that has stayed substandard for 12 months. RBI Para 4(2) |
| three months | A stock statement used for drawing power must not be older than three months. RBI Para 13(2) |
| six months | A delay beyond six months in renewal is not acceptable as a discipline. RBI Para 14 |
| thirty days | An account overdue for thirty days is tagged SMA-1 at that day's run. RBI Para 24 |
| 90 days | A term loan becomes an NPA if interest or principal is overdue for more than 90 days. RBI Para 29(1) |
| 180 days | An account becomes an NPA if credit limits are not reviewed within 180 days. RBI Para 29(5) |
| 1 percent | Banks must set aside up to 1 percent for standard assets, depending on the sector. RBI Para 64(2) |
| 15 percent | Banks must set aside 15 percent for all substandard assets. RBI Para 69 |
| 25 percent | Provisioning on the secured part of doubtful loans rises from 25 percent to 100 percent over time. RBI Para 75 |
What it says
Chapter I. Preliminary
Must know
1. Doubtful asset definition
A doubtful asset is one that has stayed substandard for 12 months.
2. Substandard asset definition
A substandard asset is one that has been an NPA for up to 12 months.
Background
3. Bad loan norms for LABs
This paper sets when a loan turns bad for local area banks.
4. Start date
These Directions came into effect on the day RBI issued them.
5. Who is covered
These Directions apply to every local area bank.
6. Out of order covers overdrafts
The out of order test covers every overdraft product, business or not.
7. Overdue means unpaid on time
Any sum not paid on its due date is overdue.
8. What the cover ratio shows
The provision cover ratio is provisions against gross bad loans.
9. Security must be tangible
Security means a tangible charge; a guarantee or comfort letter does not count.
10. Short crops defined by exclusion
A short duration crop is any crop that is not a long duration crop.
11. Wilful defaulter defined elsewhere
A wilful defaulter has the meaning given in the wilful defaulters rules.
12. Enterprise sizes defined elsewhere
Micro, small and medium enterprise are defined by the MSME credit circular.
Chapter II. General Instructions
Must know
1. Three months for stock
A stock statement used for drawing power must not be older than three months.
2. Older than that is irregular
An account run on a stock statement older than three months is irregular.
3. Three months to renew
A regular or ad hoc limit must be reviewed within three months of its due date.
4. Six months is too long
A delay beyond six months in renewal is not acceptable as a discipline.
Do it
5. Board must act on quality
The Board must take every step to stop asset quality falling.
6. Fit schedule to cash flow
Repayment dates must be set from the borrower's real cash flow.
7. Name the repayment start
Where there is a moratorium, the loan agreement must name the exact repayment start date.
8. Drawings need current assets
Drawings on a working capital account must be covered by current assets.
9. Drawing power from stock
Drawing power must be worked out from a current stock statement.
10. Disclose in the notes
The position must be shown in the notes to the accounts.
Chapter III. Asset Classification
Must know
1. Thirty days makes SMA-1
An account overdue for thirty days is tagged SMA-1 at that day's run.
BankPulse example. An instalment falls due on 1 September and is not paid. The account is tagged SMA-1 when 30 days of continuous overdue are complete. That is at the day-end run on 1 October.
2. Sixty days makes SMA-2
An account overdue past SMA-1 is tagged SMA-2 at the next month's day-end run.
3. 90-day NPA test
A term loan becomes an NPA if interest or principal is overdue for more than 90 days.
4. 180-day review rule
An account becomes an NPA if credit limits are not reviewed within 180 days.
Do it
5. Build an early warning system
A management system must catch signs of distress early, account by account.
6. Flag at day end
An account must be flagged overdue in the day-end run for its due date.
7. Objective tests only
Bad loan grading must follow objective tests so the norms are applied alike.
8. Prove a real cure
Where an account is said to be cured, satisfactory evidence must go to the auditors.
Background
9. The calendar date rules
The SMA or bad loan date is the calendar date of the day-end run.
10. Out-of-order accounts
An overdraft or cash credit account becomes an NPA if it stays 'out of order'.
11. Borrower-level classification
If one loan turns bad, all the borrower's facilities are classified as NPA.
12. Security does not save it
Security or the borrower's net worth does not stop an advance being called bad.
13. Letter of credit bills apart
A bill discounted under a letter of credit need not turn bad with the rest.
14. Derivative dues pull the rest
Where a derivative overdue turns bad, every funded facility of that client turns bad.
15. Consortium goes by own record
In a consortium each member grades the account on its own record of recovery.
16. State guarantee does not save
A State guaranteed advance still turns bad once dues stay overdue.
17. Plan sets the later grade
After a resolution plan is put in place, later grading follows these Directions.
Chapter IV. Provisioning Norms
Must know
1. Standard asset provisioning
Banks must set aside up to 1 percent for standard assets, depending on the sector.
2. Substandard provisioning
Banks must set aside 15 percent for all substandard assets.
3. Rising secured provisioning
Provisioning on the secured part of doubtful loans rises from 25 percent to 100 percent over time.
Do it
4. Doubtful unsecured provisioning
Banks must fully provide for the unsecured part of a doubtful asset.
5. Writing off loss assets
Banks should write off loss assets completely.
6. Full provision alternative
If a loss asset stays on the books, banks must fully provide for it.
Chapter VI. Repeal and Other Provisions
1. Older rules cancelled
This document cancels the older income recognition and provisioning rules for Commercial Banks.
2. Old cases continue
Penalties and legal cases already started under the old rules still continue.
How this rule has changed
The points above are the rule as it stands today, after every change listed here.
Issued on Nov 28, 2025. This is the date RBI put the rule out.
Changed on Apr 29, 2026.
- Upgrade slipped NPAs. Accounts that turned NPA in this period must be upgraded to standard once the plan starts.
- Post plan classification. After plan start, use existing Directions rules for later asset classification.
- Ceiling on extra provision. This extra provision is over normal rules but cannot go over one hundred percent.
- Ceiling on repeat provision. This extra provision for repeat cases is also over normal rules but capped at one hundred percent.
Changed on Jul 16, 2026.
- Do not book old interest. When buying a specified non-financial asset, do not book unpaid past interest or charges as income.
- Show SNFA income separately. Record money received from a specified non-financial asset as non-interest or other income in the year you get it.
- Charge SNFA expenses yearly. Record upkeep costs of a specified non-financial asset in the income statement in the year you spend the money.
- Start date of amendment. These new income and expense rules apply from October 01, 2026.
The same subject for other kinds of institution
The same subject for other kinds of institution.
RBI income recognition and provisioning rules for all India financial institutions
RBI income recognition and provisioning rules for commercial banks
RBI income recognition and provisioning rules for regional rural banks
RBI income recognition and provisioning rules for rural co-operative banks
RBI income recognition and provisioning rules for small finance banks
RBI income recognition and provisioning rules for urban co-operative banks
Other RBI rules for local area banks
RBI compliance officer and compliance function rules for local area banks 2026
RBI customer service and fair conduct rules for local area banks 2025
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