Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025

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.

3. Bad loan norms for banks

This paper sets when a loan turns bad for commercial banks.

4. Start date

These Directions came into effect on the day RBI issued them.

5. Who is covered

These Directions apply to every commercial bank.

6. Restructured accounts follow that book

Restructured accounts follow the stressed assets rules for income and grading.

7. Out of order covers overdrafts

The out of order test covers every overdraft product, business or not.

8. Overdue means unpaid on time

Any sum not paid on its due date is overdue.

9. What the cover ratio shows

The provision cover ratio is provisions against gross bad loans.

10. Security must be tangible

Security means a tangible charge; a guarantee or comfort letter does not count.

11. Short crops defined by exclusion

A short duration crop is any crop that is not a long duration crop.

12. Wilful defaulter defined elsewhere

A wilful defaulter has the meaning given in the wilful defaulters rules.

13. Enterprise sizes defined elsewhere

Micro, small and medium enterprise are defined by the MSME credit circular.

14. Property terms defined elsewhere

Commercial real estate and project finance take their meaning from the lending rules.

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.

5. Value big collateral triennially

Property held against a bad loan of ₹5 crore or more is valued once in three years.

6. Board sets who may override

The power to allow an exception must come from the Board approved policy.

7. Board must act on quality

The Board must take every step to stop asset quality falling.

8. Fit schedule to cash flow

Repayment dates must be set from the borrower's real cash flow.

9. Name the repayment start

Where there is a moratorium, the loan agreement must name the exact repayment start date.

10. Drawings need current assets

Drawings on a working capital account must be covered by current assets.

11. Drawing power from stock

Drawing power must be worked out from a current stock statement.

12. Avoid repeated ad hoc renewals

Frequent ad hoc or short renewals without good reason must be avoided.

13. Disclose in the notes

The position must be shown in the notes to the accounts.

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. Grading never stops

System grading is a running exercise, both down and up.

4. Keep logs three years

Those logs must be kept for at least three years and not be tampered with.

5. No back-end changes

Data must not be changed from the back end of the database.

6. 90-day NPA test

A term loan becomes an NPA if interest or principal is overdue for more than 90 days.

7. 180-day review rule

An account becomes an NPA if credit limits are not reviewed within 180 days.

8. Credit card NPAs

A credit card account becomes an NPA if the minimum due is unpaid for 90 days.

9. Build an early warning system

A management system must catch signs of distress early, account by account.

10. Flag at day end

An account must be flagged overdue in the day-end run for its due date.

11. Objective tests only

Bad loan grading must follow objective tests so the norms are applied alike.

12. Every account in the system

Every borrower account of any size must sit in the automated grading system.

13. Investments too

Investments must also be covered by the system.

14. Rules built into the system

The grading rules must be set inside the system to match the regulation.

15. System works out provisions

The provision needed must be worked out by the system on pre-set rules.

16. Income reversal by system

Income to be reversed on an impaired asset must come from the system, not by hand.

17. Both ways, no hands

The system must handle both downgrade and upgrade straight through, with no hand work.

18. Update at day end

The grading status must be updated as part of the day-end run.

19. A report on demand

A grading report with real dates must be producible at any moment.

20. No manual override

There must be no hand override of the system's grading.

21. Every override is audited

Every override must leave an audit trail and face the concurrent and statutory auditors.

22. Reports to the Audit Committee

Detailed override reports must go to the Audit Committee regularly.

23. Log every override

Logs of every override must hold the time, the reason and who did it.

24. Keep the rules current

The system's business logic must be kept current with the regulation.

25. Store data whole

Data entered must be captured and stored in full, with nothing cut off.

26. Map a shared login

A generic login may be used only rarely and must be mapped to a named employee.

27. One customer, all facilities

The straight through run must take in every facility and holding of one customer.

28. Status must reach the core

Where grading runs outside the core system, the status must flow back into it.

29. Front end only, once cleared

A data change must come through the application itself, after clearance.

30. Keep the transaction trail

Audit trails must capture the fields needed to trace a transaction later.

31. Log master data changes

Changes to master data must be logged.

32. Log the administrators

Activity logs of users with administrator rights must also be kept.

33. All fields in the core

Every field needed to spot a bad loan must sit in the core system.

34. A test copy for supervisors

A test copy of the system must be open to supervisors on an onsite visit.

35. Write an operating procedure

A standard operating procedure for system grading must be written for the staff.

36. Prove a real cure

Where an account is said to be cured, satisfactory evidence must go to the auditors.

37. The calendar date rules

The SMA or bad loan date is the calendar date of the day-end run.

38. Two people to override

Where an override is truly needed it takes two levels of authority.

39. Check before you enter

Data may be entered only after the user is checked and cleared.

40. Out-of-order accounts

An overdraft or cash credit account becomes an NPA if it stays 'out of order'.

41. Borrower-level classification

If one loan turns bad, all the borrower's facilities are classified as NPA.

42. Borrower-wise, not facility-wise

When one facility turns bad, every facility of that borrower turns bad.

43. Security does not save it

Security or the borrower's net worth does not stop an advance being called bad.

44. Letter of credit bills apart

A bill discounted under a letter of credit need not turn bad with the rest.

45. Derivative dues pull the rest

Where a derivative overdue turns bad, every funded facility of that client turns bad.

46. Consortium goes by own record

In a consortium each member grades the account on its own record of recovery.

47. State guarantee does not save

A State guaranteed advance still turns bad once dues stay overdue.

48. Plan sets the later grade

After a resolution plan is put in place, later grading follows these Directions.

1. Standard provisioning rate by sector

Banks must set aside 0.25 to 1 percent for standard assets, depending on the sector.

2. Extra 5% for resolution plans

A borrower with a Chapter VI-A resolution plan needs an extra 5 per cent specific provision on the outstanding debt.

3. Repeat restructuring adds 5%

Each further restructuring under Chapter VI-A adds another 5 per cent specific provision, over and above normal provisions.

4. When the extra provision unwinds

The extra provisions may be written back once the borrower repays 20% of the debt without slipping or another restructuring.

5. Non-fund cases: one clean year

Where only non-fund or overdraft facilities remain after restructuring, the extra provisions can go after one default-free year.

6. Substandard provisioning

Banks must set aside 15 percent for all substandard assets.

7. Unsecured substandard provisioning

Unsecured substandard loans need a total of 25 percent provisioning.

8. Rising secured provisioning

Provisioning on the secured part of doubtful loans rises from 25 percent to 100 percent over time.

9. Teaser-rate housing loans need 2%

Banks must set aside 2 percent for housing loans given at teaser, or low-start, interest rates.

10. Doubtful unsecured provisioning

Banks must fully provide for the unsecured part of a doubtful asset.

11. Writing off loss assets

Banks should write off loss assets completely.

12. Full provision alternative

If a loss asset stays on the books, banks must fully provide for it.

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.