RBI Income Recognition, Asset Classification and Provisiong Directions, 2025: Convergence and Divergence in Prudential Norms for Banks and AIFIs

Introduction

On November 28, 2025, the Reserve Bank of India (“RBI”) issued multiples directions for All India Financial Institutions (“AIFIs”) and Commercial Banks (“Commercial Banks” or “Banks”).  One of the major aspects covering the provisioning norms were also introduced for both AIFIs and Banks namely RBI (All India Financial Institutions- Income Recognition, Asset Classification and Provisioning) Directions, 2025 (“AIFI Directions”) and RBI  (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 (“Commercial Bank Directions”) (collectively to be referred as “Directions 2025” or “Directions”). 

The Directions 2025 has consolidated and replaced the existing prudential norms which were applicable to AIFIs and Banks. These directions are intended to align the domestic prudential regulations with the evolving international practice; enhancing transparency and strengthens the credit risk management. 

Here is a comparative study of both the direction:

• Scope and Applicability

The AIFI Directions is applicable to all AIFIs namely Export Import Bank of India (EXIM Bank), National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB) and National Bank for Financing Infrastructure and Development (NaBFID) (“AIFIs”) and have come into force with immediate effect. They operate alongside other contemporaneous RBI frameworks, particularly the RBI (All India Financial Institutions Resolution of Stressed Assets) Directions, 2025 and sector-specific credit, securitisation and transfer of loan exposure directions. This ensures regulatory consistency across the lifecycle of credit from origination to stress resolution.

Whereas, the Commercial Bank Directions is applicable to all the Commercial Banks which comes under the ambit of the banking companies (other than Small Finance Banks, Payment Banks, and the Local Area Banks) and the State Bank of India, and have come into force with immediate effect. They operate alongside other contemporaneous RBI frameworks, particularly the RBI (All India Financial Institutions Resolution of Stressed Assets) Directions, 2025 and sector-specific credit, securitisation and transfer of loan exposure directions. This ensures regulatory consistency across the lifecycle of credit from origination to stress resolution.

Key Changes and Regulatory Emphasis

CHAPTER I

1. Definitions

The Directions 2025 covers major definitions including but not limited to-doubtful asset; exposure; loss asset; non-performing asset; overdue status; security; substandard asset; unsecured exposure; wilful defaulter. However, the Commercial Bank Directions additionally covers specific treatment to “Out of Order Status”. 

As per the Commercial Bank Directions, the term “Out of Order Status” has been defined as a cash credit/ overdraft (“out of order”) if any of the following conditions are satisfied:

1. the outstanding balance remains continuously in excess of the sanctioned limit / drawing power for 90 days; 
2. the outstanding balance is less than the sanctioned limit / drawing power but there are no credits continuously for 90 days; 
3. the outstanding balance is less than the sanctioned limit / drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

The above provisions shall be applicable to all the credit facilities which are being offered as an overdraft facility including those not meant for business purpose and / or which entail interest repayments as the only credits.

CHAPTER II

2. Board Level Accountability and Governance

A major development of the Directions is the enhancement of the Board oversight. AIFIs are now required to adopt policies which are approved by the Board covering the following aspects:

• Objective income recognition based strictly on recovery records;

• Sector-wise and stress-based provisioning above regulatory minima, where warranted; and
• Appointment and governance of external agencies for stock audits and collateral valuation.

However, there are additional points of consideration as provided in the Commercial Bank Directions, which provides that the Directions shall specify the level to which the floating provisions can be created; circumstances which would be considered as extraordinary for the utilization of floating provisions for making specific provisions in impaired accounts. Further the Commercial Bank Directions have provided that the board shall make a a well-defined methodology and periodicity for the review and renewal of credit facilities in accordance with the applicable regulatory guidelines. The Board shall also provide for a clear delegation of powers for authorising exceptions to the automated Income Recognition, Asset Classification and Provisioning processes, ensuring that such exceptions are approved at appropriate levels, are adequately documented, and remain within the overall regulatory framework.  

Boards are now explicitly tasked with identifying deterioration or degradation in the asset quality, strengthening the credit risk management, and leveraging early-warning systems such as Central Repository of Information on Large Credits (“CRILC”). This represents a shift from compliance-driven monitoring approach to a proactive asset-based quality governance.

3. Prudence in Lending and Borrower Awareness

The Directions reinforce borrower transparency and responsible finance by mandating the following:

• Clear disclosure of repayment schedules, due dates, principal–interest break-ups and Special Mention Account (“SMA”)/Non-Performing Asset (“NPA”) triggers in loan agreements;

• Explicit communication of repayment commencement dates in moratorium-linked facilities; and
• Structured borrower education through websites, branch displays and front-line staff.

In addition to the above, mandatory stock audits (Rs. 5.00 crore and above NPAs) and periodic valuation of immovable collateral have been advised in the Directions to reduce valuation divergence and improve reliability of security assessment.

Further in terms of Commercial Bank Direction, the banks are required to exercise prudence in managing working capital accounts by ensuring that drawings are properly backed by current assets. Banks must determine drawing power based on current stock statements, and such statements should generally not be older than three months. Any outstanding amounts based on stock statements older than three months are to be treated as irregular. Also, the Commercial Banks Direction laid down strict discipline for the timely review, renewal, and regularisation of credit facilities, particularly in respect of regular and ad-hoc limits. Banks are required to ensure that all regular and ad-hoc credit limits are reviewed or regularised within three months from the due date of review or the date of ad-hoc sanction. The same has been inculcated to prevent the prolonged reliance that has been put on the temporary or unreviewed facilities, which has been masked underlying stress in borrowers’ account. 

In cases, where the constraint is there such as non-availability of statements; or any other delay in the review or the renewal process, the Banks must be able to provide the documentary evidence stating the reasons for delay or stating that the process has been initiated and contemplating the timeline for its completion. Though this relief will be not act as an indefinite relief. As per the Commercial Banks Direction states that any delay beyond six months is undesirable as a matter of standard, undermining the RBI’s expectation of timely credit assessment.

Further, Banks are required to strictly adhere to their Board-approved policy on the methodology and periodicity of review and renewal of credit facilities. The Commercial Bank Directions discourage the application or usage of a frequent and repeated ad-hoc sanctions or short-term renewals without any acceptable justification, as such practices may dilute the credit standards and weaken risk oversight. 

To strengthen the regulatory oversight, Banks must capture complete and correct data relating to regular, ad-hoc, and short-term renewals in their core banking and management information systems. The same records must be made available for scrutiny during legal and financial audits and inspections. In addition to this, the processes governing review and renewal of credit facilities are required to fall within the scope of concurrent, internal, and internal control audits, thereby reinforcing accountability and transparency.

4. Disclosure

The AIFIs and the banks are required to provide suitable disclosures in its Notes to Accounts as per the requirements of their respective disclosure’s requirements.

CHAPTER III

5. System-Driven Asset Classification

The Directions further introduced system-based, day-end recognition of overdue status, SMA and NPA classification. Asset classification dates must reflect the actual calendar date of delinquency, eliminating scope for manual intervention or post-facto adjustments.

Importantly, it has been reaffirmed that once a borrower is classified as NPA, all facilities/loans and investments relating to that borrower are treated as non-performing, subject to limited exceptions as provided.

Though in terms of a major structural difference, the Commercial Banks has to follow a system driven prudential framework. The Commercial Banks must comply with a fully system based process to ensure uniform application, objectivity and regulatory compliance. All the accounts are required to be covered under an automated IT based system for asset classification; upgradation; and provisioning. Classification of accounts as overdue, SMA, NPA and any upgradation must be carried out automatically as part of the day-end process, ensuring that the classification date reflects the actual calendar date of default. Further, the downgrade and upgrade of accounts must be done through a Straight Through Process without any manual intervention. However, there is certain exceptions provided when a manual intervention is allowed which are as follows:

• Approved through at least two-level authorisation as per a Board-approved policy,

• Preferably carried out from a centralised location,

• Fully documented with reasons, and

• Supported by complete audit trails, including date and time stamps, user IDs, and account details.

Though such exceptions will be subjected to concurrent and statutory audit, and periodic reports must be placed before the Audit Committee or appropriate authority.

6. Classification as Non-Performing Assets

The Directions provides for the cases where the account to be classified as standard asset or a NPA. However, the Commercial Banks has certain additional cases where the accounts are classified as SMA/NPA. 

Below is the summary table for classification of accounts as SMA/NPA:

CRITERIA/ CASE	AIFIs	COMMERCIAL BANK
Term Loan	Interest and / or instalment of principal remains overdue for a period of more than 90 days	Interest and / or instalment of principal remains overdue for a period of more than 90 days
Bills Purchased and Discounted	Overdue for a period of more than 90 days.	Overdue for a period of more than 90 days.
Agricultural Advances	Instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops and one crop season for long duration crops.	Instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops and one crop season for long duration crops.
Securitisation Transactions	The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of the Securitisation Transactions, Directions 2025.	The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of the Securitisation Transactions, Directions 2025.
Derivative Transactions	Overdue receivables representing positive mark-to-market value of a derivative contract, remain unpaid for a period of 90 days from the specified due date for payment.	Overdue receivables representing positive mark-to-market value of a derivative contract, remain unpaid for a period of 90 days from the specified due date for payment.
Cash Credit/Overdraft Accounts	–	The account remains ‘out of order’.
Working Capital Accounts	–	irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower’s financial position is satisfactory.
Credit Card Accounts	–	Minimum amount due, as mentioned in the statement, is not paid fully within 90 days from the payment due date mentioned in the statement.

Other than the above-mentioned cases the accounts can be classified as a SMA/NPA as per the conditions laid down in the Reserve Bank of India (All India Financial Institutions – Resolution of Stressed Assets) Directions, 2025 and Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025.

It is important to note that the classification shall be done borrower wise and not sanctioned facility wise. Meaning thereby that in case the lender has granted multiple facility to the borrower, then the account of the borrower shall be treated as SMA/NPA as a whole and not in respect of a particular facility which has become due or irregular. In case there are some deficiencies of temporary nature, such shall not be a point of consideration for not declaring the account as a SMA/NPA, the classification should be based solely on the record of recovery.

7. Refined Treatment of Special Credit Categories

To provide clarity and to reduce the procedural ambiguity amongst the AIFIs and Banks for the uniform application, a detailed guidance has been provided for specific cases, including:

• Consortium lending arrangements;

• Derivative transactions and crystallised MTM receivables;

• Agricultural advances (with crop-season-based delinquency norms retained);

• Government-guaranteed exposures;

• Loans with moratorium for payment of interest

• Export project finance affected by political or sovereign constraints; and
• Take-out finance and loan transfer transactions.

The Commercial Banks to dealt with certain additional specific cases as mentioned below:

• Advances to Primary Agricultural Credit Societies (PACS) / Farmers’ Service Societies (FSS) ceded to banks; and
• Credit Card Accounts.

8. Strengthened NPA Categorisation and Upgradation Norms

NPAs will be continued to be classified into substandard, doubtful and loss assets, but with more stricter triggering points for straightaway downgrade in cases where security erosion, fraud or recovery threats are evident. The Directions also reinforce that:

• Security value or borrower net worth cannot delay NPA recognition;

• Upgradation to ‘standard’ status is permitted only upon full clearance of arrears across all facilities; and
• Partial or technical write-offs cannot be used to camouflage asset quality.

The accounts shall be upgraded as ‘standard asset’ only if the entire amount including the principal and interest has been paid by the borrower. And in case the account has been classified as a NPA and the same has to be upgraded then in that compliance as provided under the Reserve Bank of India (All India Financial Institutions – Resolution of Stressed Assets) Directions, 2025 and Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 shall be complied with in addition to the Directions. 

CHAPTER IV

9. General Principles for Provisioning

The provisioning shall be made only on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the value that is realisable. And in order to realise the security, the definition as provided in the Direction should be construed carefully. As per the Direction, the term Security has been defined as “shall mean tangible security properly charged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters, etc.” 

The Directions 2025 clarifies what shall constitute for the value of the underlying security. As per the Directions from the scope of what constitutes as secured, it has expressly excluded the project related rights for e.g. licenses, authorizations and similar intangible rights which are being treated as a tangible security thereby requiring such advances to be disclosed as unsecured. However, an exception has been carved out for infrastructure projects under the build-operate-transfer (BOT) model, where annuities and toll collection rights may be recognised as tangible security, provided the bank’s entitlement is legally enforceable, irrevocable, and supported by contractual compensation mechanisms in case of revenue shortfalls. 

Extending this principle to public-private partnership (PPP) projects, the RBI permits the AIFI and Commercial Banks exposures to be treated as secured to the extent assured by the project authority under the concession framework, subject to robust safeguards such as escrow mechanisms with lender priority, risk-mitigation provisions, lender substitution and termination rights, and compulsory buy-out obligations upon termination. Collectively, these provisions reflect a nuanced regulatory approach that balances prudential conservatism with the commercial realities of project finance.

10. Comprehensive and Risk-Sensitive Provisioning Framework

The provisioning regime has been comprehensively restated, with clear minimum floors and scope for prudential overlays. Key highlights include:

• Revised standard asset provisioning rates across sectors such as agriculture, Small and Medium Enterprises, Commercial Real Estate and Commercial Real Estate–Residential Housing;

• Higher provisioning for unsecured substandard exposures, with calibrated relief for infrastructure loans subject to escrow safeguards;

• Time-based graduated provisioning for doubtful assets, extending up to 100% for long-pending exposures;
• Mandatory 100% provisioning or write-off for loss assets.

The Directions also encourage counter-cyclical provisioning, allowing AIFIs to build buffers in good times based on sectoral and macroeconomic risk assessments.

11. Special Provisioning Scenarios

To align the accounting recognition with the actual risk absorption capacity specific guidance has been provided for:

• Export Credit Guarantee Corporation (ECGC) and Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) /National Credit Guarantee Trustee Company (NCGTC) guaranteed advances;

• Project finance exposures (construction vs. operational phase);

• Country risk provisioning for overseas exposures; and
• Derivative and securitisation-related credit exposures.

Fraud accounts, with accelerated provisioning (up to four quarters) has been a additional special provision scenario with respect to Banks.

CHAPTER V

12. Conservative Income Recognition Norms

Income recognition principles remain conservative and recovery based. Interest income is recognised on an accrual basis only for standard assets, while NPAs require cash-based recognition. Accrued but unrealised income must be reversed upon NPA classification, including in respect of government-guaranteed accounts and derivative exposures.

Detailed accounting treatment has also been prescribed for interest suspense, market to market reversals and recovery appropriation, ensuring consistency across AIFIs.

Our Comments:

The Directions mark a significant consolidation and modernisation of the prudential framework applicable to All India Financial Institutions and Commercial Banks. By emphasising early recognition of stress, system-driven classification, robust provisioning and enhanced Board oversight, the Directions aim to strengthen balance sheet resilience and reinforce market discipline.

For AIFIs and the Banks, the new framework necessitates tighter internal controls, upgraded MIS capabilities and a more forward-looking approach to credit risk management. Collectively, these reforms contribute to greater transparency, stability and confidence in India’s development finance ecosystem.

 

-By Meghana Joshi
Senior Partner

The author has an experience of over 20 years in the field of Banking, Infrastructure and Project Finance & Project Advisory services for PPP Projects in India and abroad. She is an expert in drafting and finalization of the financing/security documentation for term loans, working capital and debentures, corporate debt restructuring documentation, InvIT documentation, and legal due diligence relating to various infrastructure projects in road, real estate, power, ports, hospitality, petrochemicals, telecommunication and logistics sector. She also has a rich experience in handling project advisory work such as drafting/vetting of concession agreement/ RFP/ RFQ and other bid documents relating to various authorities. In case of any clarifications, please feel free to contact the author at meghana.joshi@orbitlaw.co.in

Research & Assistance: Saman Rizwan, Associate.

 

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