How a loan account moves from Standard to NPA under RBI's IRAC norms, what "SMA" actually means, and how much a bank must provide for at each stage.
A Non-Performing Asset (NPA) is a loan or advance where interest and/or instalment of principal remains overdue for a period of more than 90 days. RBI's Income Recognition & Asset Classification (IRAC) norms govern exactly how and when a bank must classify, provide for, and eventually write off such an account.
Before an account technically becomes an NPA, RBI requires banks to flag early stress through SMA sub-categories â an early-warning classification, not yet an NPA:
Banks report SMA-1 and SMA-2 accounts (and NPAs) to the Central Repository of Information on Large Credits (CRILC) for exposures above the prescribed threshold, so early stress across the banking system is visible to all lenders.
| Category | Criteria |
|---|---|
| Sub-Standard | NPA for a period ⤠12 months |
| Doubtful | Remains NPA for more than 12 months, split into D1 (up to 1 year as doubtful), D2 (1-3 years) and D3 (>3 years) |
| Loss Asset | Identified as a loss by the bank, auditor or RBI inspection â considered uncollectible with realisable value negligible, though not yet fully written off |
Provisioning percentages rise as an account ages further into NPA status, reflecting the falling probability of recovery:
| Classification | Provisioning Requirement (indicative) |
|---|---|
| Standard Asset | 0.25% â 1% (varies by sector; higher for restructured/commercial real estate) |
| Sub-Standard (secured) | 15% of outstanding |
| Sub-Standard (unsecured exposure) | 25% of outstanding |
| Doubtful D1 | 25% of secured portion + 100% of unsecured portion |
| Doubtful D2 | 40% of secured portion + 100% of unsecured portion |
| Doubtful D3 | 100% (fully provided) |
| Loss Asset | 100% of outstanding |
Figures are indicative and illustrative of the RBI framework's general structure â always refer to the extant Master Circular on IRAC norms for the exact prescribed percentages in force.
Once an account is classified NPA, the bank must stop recognising interest income on an accrual basis â any interest is taken to income only when actually received (cash basis), and any interest already accrued but unpaid is reversed from the P&L. This is the core reason a rising NPA book directly compresses reported bank profits, beyond just the provisioning charge.
An NPA account can be upgraded back to Standard only after the borrower clears all arrears of interest and principal â a partial payment or one-time settlement of only a portion of dues does not qualify for upgradation. Recovery of dues that can't be regularised typically moves to the mechanisms covered in Recovery â SARFAESI, DRT & IBC.
Related deep-dive: See the JAIIB notes on Credit Management (5 Cs, DSCR, NPA/SMA, wilful defaulters) for exam-focused MCQs.
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