The Reserve Bank of India has issued the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 with immediate effect.
The Directions introduce a comprehensive prudential regime aimed at removing discretion from banks in the areas of income recognition, NPA classification, provisioning and asset quality disclosure. The framework significantly tightens the governance of credit risk, automation standards, security valuation and provisioning discipline.
Applicability of the Directions
The Directions apply to all commercial banks, including the State Bank of India and corresponding new banks, but exclude Small Finance Banks, Payments Banks and Local Area Banks. Compliance with additional restructuring rules contained in the Resolution of Stressed Assets Directions, 2025 remains mandatory.
Revised Definitions Impacting Risk Classification
A non-performing asset is defined as a credit facility that has ceased to generate income for the bank. A cash credit or overdraft account becomes “out of order” if the outstanding balance continuously exceeds the sanctioned limit for ninety days, or if there are inadequate credits to cover interest debited during the same period. These definitions now operate strictly through system-based tagging as part of the day-end process.
A significant regulatory shift is the narrow definition of “security.” Only tangible, enforceable security qualifies. Personal guarantees, corporate guarantees and comfort letters are expressly excluded from being treated as security for asset classification and provisioning purposes. While these instruments remain enforceable, they no longer reduce provisioning liabilities or delay NPA classification.
Any exposure in which the realisable value of security is assessed as ten per cent or less of the outstanding amount must be treated as unsecured.
Mandatory Automation of Asset Classification
The Directions require all banks to adopt full automation of NPA tagging, provisioning calculations, income de-recognition and upgradation. Human intervention in the system is prohibited except in exceptional circumstances, and any manual override must undergo dual authorisation, audit trail logging and subsequent auditing. System reports must reflect the precise date on which an asset becomes overdue, classified as SMA and subsequently tagged as NPA.
For illustration, where repayment falls due on March 31 and remains unpaid on the same date, the asset becomes overdue on March 31. If unpaid for thirty and sixty days thereafter, the account is respectively tagged as SMA-1 and SMA-2, and becomes NPA upon completion of ninety days from the original overdue date.
NPA Classification and End-of-Year Regularisation
The Directions reiterate that NPA classification is borrower-wise, not facility-wise. Once a facility becomes non-performing, all other facilities to the same borrower must be similarly classified. Mere availability of collateral, net worth of promoters or existence of guarantees does not delay NPA classification.
Where credits are posted just before the balance sheet date, banks are required to justify the genuine nature of regularisation. If underlying weaknesses persist, the account must still be classified as NPA irrespective of last-minute deposits.
Accelerated Downgrading in Case of Security Erosion
Where security value experiences significant erosion, accelerated asset downgrade is mandated. If realisable value falls below fifty per cent of the value earlier assessed, the account must be classified as doubtful. If realisable value falls below ten per cent, the account must be immediately classified as a loss asset.
Upgradation of Non-Performing Assets
A non-performing asset can be upgraded to standard status only upon full clearance of all arrears of interest and principal across all credit facilities of the borrower. Partial repayment or technical write-off does not permit upgradation.
Provisioning Requirements
Substandard assets attract a general provisioning requirement of fifteen per cent, while unsecured substandard assets require provisioning at twenty-five per cent. Doubtful assets are to be provided for in a phased manner based on the period spent within the doubtful category, ranging from twenty-five to one hundred per cent. Loss assets must be written off in full or provided for at one hundred per cent if retained in the books.
Floating provisions can only be utilised in extraordinary circumstances and require prior approval of the Reserve Bank.
Sector-Specific Clarifications
In agricultural lending, the delinquency measure continues to be based on crop season duration. For short-duration crops, principal and interest must not remain overdue for more than two crop seasons; for long-duration crops, one season triggers non-performance. Post natural calamity restructuring, revised loan terms govern classification.
Credit card facilities must be classified as NPAs if minimum dues remain unpaid for ninety days from the payment due date indicated in the statement.
Compliance Significance
The Directions establish a fully system-driven prudential regime with no scope for subjective forbearance by credit officers. The regulatory intent is to curtail evergreening, delay in NPA recognition, and provisioning manipulation. The mandated technology standards, audit trails and valuation integrity requirements mark one of the most substantial transformations in asset classification norms announced by the Reserve Bank to date.
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