RBI Revises IRACP Norms for NBFCs and Co-op Banks

RBI/2025-26/208 DOR.STR.REC.411/21-04-048/2025-26; Dated: 13.02.

The Reserve Bank of India (RBI) has issued Amendment Directions relating to Income Recognition, Asset Classification and Provisioning (IRACP) applicable to Rural Co-operative Banks and Non-Banking Financial Companies (NBFCs).

The amendments aim to reinforce prudential discipline and ensure consistency in recognition of income and classification of loan assets.

1. Income Recognition Based on Record of Recovery

The revised directions reiterate that:

The policy on income recognition must be strictly based on the record of recovery
Recognition of income should reflect actual realisation rather than notional accrual

This strengthens prudential accounting practices and prevents overstatement of income.

2. Accrual-Based Recognition for Standard Assets

Under the amended framework:

Banks and NBFCs may recognise income on an accrual basis
Only for credit facilities classified as ‘Standard’ assets

Once a loan account ceases to be standard, accrual-based income recognition is no longer permitted.

3. Treatment of Non-Performing Assets (NPAs)

For loan accounts classified as Non-Performing Assets (NPAs):

Income recognition must follow prudential norms linked to actual recovery
Accrued income cannot be recognised unless realised

This ensures accurate reflection of asset quality and financial performance.

4. Upgradation of NPAs to Standard Category

The amendment clarifies that:

NPA accounts may be upgraded to ‘Standard’ assets
Only when the borrower pays entire arrears of interest and principal

Partial repayment or restructuring without full clearance of overdue amounts will not qualify for upgradation.

5. Regulatory Objective

The amended IRACP directions aim to:

Strengthen asset quality recognition
Ensure conservative and realistic income recognition
Improve transparency in financial statements
Align prudential norms across regulated entities

6. Key Takeaway

RBI’s amended IRACP directions reinforce recovery-based income recognition and strict conditions for upgradation of NPAs, requiring full repayment of overdue principal and interest before an account can be reclassified as a standard asset.