NPA Classification & IRAC Norms — Complete Guide for JAIIB PPB 2026

Non-Performing Assets (NPAs) represent one of the most critical challenges in Indian banking and form a cornerstone topic in the JAIIB PPB examination. The Income Recognition and Asset Classification (IRAC) norms, prescribed by the RBI, provide the framework for identifying, classifying, and provisioning for NPAs. Every banker must understand these norms thoroughly, not just for exam success but for day-to-day banking operations. This guide covers the complete NPA classification framework including SMA categories, asset classification norms, provisioning requirements, and special rules for agricultural advances.

What is a Non-Performing Asset (NPA)?

A Non-Performing Asset is a loan or advance where interest or principal payment remains overdue for more than 90 days. For agricultural loans, the overdue period varies depending on the crop season. Once an asset is classified as NPA, the bank must stop recognizing income (interest) on that asset on an accrual basis — income can only be recognized when actually received. This is the core principle of income recognition under IRAC norms.

The 90-day norm applies uniformly to all commercial banks including scheduled commercial banks, small finance banks, and foreign banks operating in India. The classification is done at the borrower-account level (not borrower level for most cases), though in certain circumstances, accounts of the same borrower may be treated separately.

SMA (Special Mention Account) Classification

Before an account turns NPA, the RBI requires banks to identify and report stressed accounts through the Special Mention Account (SMA) framework. SMA classification serves as an early warning system, enabling banks to take corrective action before the account fully deteriorates. The SMA categories are:

Banks are required to report SMA-1 and SMA-2 accounts of ₹5 crore and above to CRILC (Central Repository of Information on Large Credits) on a weekly basis. This data is used for the RBI's early warning framework and the resolution mechanism under the June 7, 2019 circular.

NPA Classification Categories

Once an account is classified as NPA (overdue beyond 90 days), it is further sub-classified into three categories based on the period for which it has remained non-performing and the likelihood of recovery:

1. Sub-Standard Assets

An asset that has remained NPA for a period of 12 months or less is classified as sub-standard. In such cases, there is a real possibility of the bank sustaining some loss if deficiencies in the account are not corrected. The current erosion in value may not be significant, but there is a defined credit weakness that jeopardizes the liquidation of the debt.

2. Doubtful Assets

An asset that has remained in the sub-standard category for 12 months is upgraded to the doubtful category. Doubtful assets are further divided into three sub-categories based on the period for which the asset has remained doubtful:

• Doubtful-1 (D1): Remained doubtful for up to 1 year
• Doubtful-2 (D2): Remained doubtful for 1 to 3 years
• Doubtful-3 (D3): Remained doubtful for more than 3 years

3. Loss Assets

An asset is classified as a loss asset when it is considered uncollectable and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value. Loss assets are identified by the bank's internal audit, RBI inspection, or external auditors. Even if the amount has not been fully written off, the bank must provide 100% provisioning.

Provisioning Norms

Agricultural NPA — Special Rules

Agricultural advances have different NPA recognition timelines depending on the type of crop. For short-duration crops (crop season up to one year), an agricultural loan is classified as NPA if interest/installment remains overdue for two crop seasons. For long-duration crops (crop season longer than one year), the loan becomes NPA if overdue for one crop season. This relaxation recognizes the seasonal and cyclical nature of agricultural income.

For example, if a Kharif crop loan has a due date of January 31 and is not repaid, it will be classified as NPA only after the due date of the next Kharif season's installment passes without payment — effectively giving the farmer two harvest seasons to repay.

NPA Upgradation

An NPA account can be upgraded to standard category if the borrower pays all overdue amounts (arrears of interest and principal). The upgradation is based on the record of recovery performance and not merely on the basis of security value or restructuring exercise. The account should demonstrate satisfactory performance over a specified period before being upgraded.

Write-off vs Technical Write-off

A write-off means the bank removes the NPA from its books entirely after making 100% provisioning. However, the borrower's legal liability to repay continues. In a technical write-off, the bank shifts the NPA to a memorandum account while continuing recovery efforts. Technical write-offs reduce reported gross NPA figures but the bank continues pursuing recovery through legal means including SARFAESI, DRT, and Lok Adalat.

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