## Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP)

### Four Asset Categories

```

Assets

├── Standard Assets (No problem; usual business risk)

├── Sub-Standard Assets (NPA ≤ 12 months)

├── Doubtful Assets (NPA > 12 months)

└── Loss Assets (Loss identified; 100% provision)

```

---

### 1. Standard Assets

No problem in the normal course other than usual business risk.
SMA (Special Mention Accounts): Early warning signals before NPA classification:
SMA: Account showing stress signals
SMA-1: Overdue 31 to 60 days
SMA-2: Overdue 61 to 90 days

---

### 2. Sub-Standard Assets

Classified as NPA for a period not exceeding 12 months.
Provisioning:
Secured: 15% of total outstanding
Unsecured: 25% of total outstanding

---

### 3. Doubtful Assets

NPA for a period exceeding 12 months.
Provisioning (secured portion):

Period as Doubtful	Provision (Secured)
Up to 1 year	25%
1 year to 3 years	40%
More than 3 years	100%
Unsecured portion	100% (always)

---

### 4. Loss Assets

Loss has been identified by the bank, auditors, or RBI inspectors.
Provision: 100% (or write off entirely).

---

### Memory Aid for Provisioning

```

Sub-Standard: Secured=15%, Unsecured=25%

Doubtful ≤1yr: Secured=25%, Unsecured=100%

Doubtful 1-3yr: Secured=40%, Unsecured=100%

Doubtful >3yr: Secured=100%, Unsecured=100%

Loss: 100% (always)

```

Worked example

### Example 1

Numerical Example: A term loan of ₹10 lakh becomes NPA on 1st April 2023. It is secured by tangible assets worth ₹6 lakh. As at 31st March 2025 (24 months as NPA), what category and what provision is required?

Solution:

Time as NPA: 24 months > 12 months → Doubtful Asset
Time as Doubtful: 24 months = between 1 and 3 years → Provision on secured = 40%
Secured outstanding = ₹6 lakh → Provision = ₹2.4 lakh
Unsecured outstanding = ₹4 lakh → Provision = 100% = ₹4 lakh
Total provision required = ₹6.4 lakh

### Example 2

Classification Question: A cash credit account has been continuously overdue for 65 days. What is its SMA classification?

Answer: SMA-2 (overdue 61 to 90 days). It has not yet become NPA (which requires 90+ days overdue), but it is flagged as a stressed account requiring monitoring.

⚠️ Common exam mistakes

Mixing up provisioning percentages: Sub-standard secured = 15% (NOT 25%); Sub-standard unsecured = 25% — students often swap these.
Forgetting that the unsecured portion of a Doubtful asset always requires 100% provision regardless of how long it has been doubtful.
Confusing SMA-1 and SMA-2 thresholds: SMA-1 = 31–60 days overdue; SMA-2 = 61–90 days overdue.
Thinking 'Loss Asset' means the asset has been written off — it means loss has been identified; it may still be on books but requires 100% provision.

Reference:

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Prudential Norms — Asset Classification and Provisioning

Worked example

⚠️ Common exam mistakes