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Informist, Monday, Apr. 27, 2026

MUMBAI – The Reserve Bank of India Monday issued directions on banks' asset classification, income recognition and provisioning aligned with global best practices while retaining the existing non-performing asset norms. The new guidelines titled the Reserve Bank of India (Commercial Banks - Asset Classification, Provisioning and Income Recognition) Directions, 2026 will come into effect from Apr. 1, 2027, giving lenders nearly a year to transition to the revised regime.  

A key highlight of the directions is the adoption of an expected credit loss-based provisioning system, aimed at strengthening risk recognition and enhancing transparency in bank balance sheets. The RBI said the revised norms are designed to align domestic regulations with internationally accepted financial reporting standards and improve comparability across institutions.  

Under the new framework, banks will adopt a staging approach to provisioning based on changes in credit risk, while continuing with the extant system for identifying NPAs. The central bank has also clarified the categorisation of stressed assets. Loans that remain non-performing for 12 months or less will be classified as 'sub-standard assets'. Once such assets remain in the sub-standard category for a further 12 months, they will be upgraded to 'doubtful assets'. Further, assets identified as uncollectible, but not fully written off, will be categorised as 'loss assets'.  

These classifications are aimed at providing clearer recognition of asset quality deterioration and ensuring timely provisioning by banks. The RBI has retained the existing definition of NPAs, under which a loan is classified as non-performing if interest or principal remains overdue for more than 90 days. The directions also reaffirm that asset classification is to be applied at the borrower level—meaning all exposures to a borrower turn NPA if any one facility defaults.  

Expected credit loss calculations for financial instruments originated from Apr. 1, 2027, will be anchored to the effective interest rate determined at initial recognition, reinforcing alignment with globally accepted accounting frameworks, the RBI said. For purchased or originated credit-impaired assets, banks will be required to use a credit-adjusted interest rate. However, lenders have been given transitional flexibility, allowing them to compute opening expected credit loss as of Apr. 1, 2027, using the contractual interest rate as a discounting factor, before fully migrating all such exposures by Mar. 31, 2030.

The central bank also outlined detailed guidelines on computation of effective interest rates, requiring banks to factor in all contractual cash flow elements—such as prepayment, extension, and call options, while explicitly excluding expected credit losses from these estimates. The rate must incorporate all integral fees, transaction costs, and any premiums or discounts associated with the financial instrument.

Additionally, expected credit loss on loan commitments will need to be discounted using the applicable interest rates or a close approximation, while for revolving credit facilities and guarantees, where expected interest rate cannot be directly determined, banks must instead use a discount rate reflecting prevailing market conditions and risk profiles.

In addition to commercial banks, the RBI said it will also issue similar norms for All India Financial Institutions. The central bank noted that the transition would involve fair valuation of loan portfolios at the time of adoption, with adjustments made to retained earnings rather than the profit and loss account.  

The RBI said the revised framework is expected to enhance credit risk management practices by incorporating forward-looking information, including macroeconomic factors, into provisioning decisions. It also mandates stronger governance structures, including board oversight and model validation mechanisms.  End

Reported by Kabir Sharma

Edited by Akul Nishant Akhoury

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