Income Recognition Norms for NPAs — Reversal of Interest
## Income Recognition Norms for Non-Performing Assets
### The Core Rule
Once an account becomes an NPA, the bank must stop recognising income from that account on an accrual basis. Income can only be recognised when it is actually received (cash basis).
### What Must Be Reversed?
When an account becomes NPA at close of any year, the bank must reverse or provide for:
1. Interest income accrued or already credited to the income account in past periods (to the extent not yet realised in cash).
2. Fees, commission, and other similar income that have accrued but not been collected — these must:
Cease to accrue in the current period, AND
Be reversed or provided for with respect to past periods if uncollected.
### Auditor's Responsibility
The statutory auditor must verify that the branch has complied with these income recognition norms for every account classified as NPA. This involves:
Checking that previously accrued interest has been reversed/provided for.
Confirming that no fresh interest accrual has been booked after the NPA date.
Verifying treatment of fees and commission income on NPA accounts.
> Remember: The sub-standard, doubtful, and loss categories are all NPA. All income recognition rules apply to all these categories equally.
Worked example
### Example 1
Scenario (Q9): Term Loan of Sub-Standard Asset — CA Z's Responsibility
Facts: A term loan was classified as Sub-Standard Asset during 2022-23 (EMIs outstanding > 90 days). CA Z has agreed with the classification.
CA Z's additional responsibility (income recognition):
1. Check whether all interest accrued or credited to P&L in prior periods (while the account was Standard) has been reversed or provided for, since it was not realised.
2. Confirm that the branch has ceased accruing interest on this account from the date it became NPA.
3. Verify that fees, commission, and similar income previously accrued on this account have also been reversed or provided for to the extent uncollected.
4. If the branch has not done the above, the auditor must report this as non-compliance with RBI income recognition norms.
⚠️ Common exam mistakes
Stopping at asset classification verification without separately checking income recognition compliance — the two are independent requirements.
Assuming that reversing current-year interest is sufficient — interest accrued in prior periods that was credited to income but not collected must also be reversed.
Overlooking non-interest income (fees, processing charges, commission) on NPA accounts — these are subject to the same reversal/cessation rules as interest.
Treating partial cash receipts on NPA accounts as income immediately — on NPAs, cash received is first applied to principal, not income, unless the bank's policy specifies otherwise per RBI guidelines.
Bare-Act text Income Recognition — Reversal of Accrued Income on NPA Accounts · RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning · click to expand
If any advance account becomes NPA as at close of any year, the entire interest accrued or credited to income account in past periods should be reversed or provided for, if the same is not realized. In respect of NPAs, fees, commission and other similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.