India's banks carried Rs 4.28 lakh crore in gross NPAs at their peak in March 2018 — roughly 11.2% of all advances. That number was not an accident. It was the product of a decade where loans were evergreened through repeated ad-hoc renewals, interest was capitalised to avoid default recognition, and restructuring schemes were stacked on top of restructuring schemes so that no one had to admit the money was gone. Agricultural NPAs hid behind seasonal exemptions. Co-operative banks used 180-day norms when commercial banks had moved to 90. And even among commercial banks, the definition of "out of order" was applied inconsistently enough that the same loan could be standard at one bank and NPA at another.
Getting the system clean took regulatory force applied over three decades. The Narasimham Committee recommended the 90-day norm in 1991. The June 2019 Prudential Framework replaced every previous resolution mechanism — CDR, SDR, S4A, JLF, and the struck-down February 2018 circular — with a single time-bound process. The Insolvency and Bankruptcy Code gave banks a credible threat of liquidation. And the November 2025 entity-specific directions embedded stressed asset norms directly into every bank type's regulatory architecture, withdrawing the historical circulars while preserving their substance.
The NPA story runs through every other topic in this series. The PMC Bank collapse was an NPA story — Rs 6,500 crore hidden through fictitious accounts. The NBFC crisis of 2018 was about NPAs in the shadow banking system. The priority sector lending framework is shaped by NPAs — agricultural debt waivers are politically popular precisely because farm loans have the highest default rates.
The Recognition Problem: When Does a Loan Go Bad?
The answer seems simple — 90 days overdue. But getting Indian banking to accept that standard took twenty years, and enforcing it consistently required an automated mandate that did not arrive until November 2025.
The September 2009 circular on NPA computation (RBI/2009-10/168) (since withdrawn) revealed how deep the inconsistency ran:
"Banks follow different methods to compute and report Gross and Net Advances, and Gross and Net NPAs. There is a need for uniformity across banks in reporting, so as to avoid any scope for different interpretations."
The August 2020 circular on ad-hoc credit reviews (RBI/2020-21/27) addressed the evergreening problem directly:
"An account where the regular/ad-hoc credit limits have not been reviewed/renewed within the prescribed timeline will be treated as Non-Performing Asset."
Banks had been using ad-hoc renewals to restart the 90-day clock. Renew the facility before default, and the overdue counter resets. The circular closed that loophole: "Banks should avoid frequent and repeated ad-hoc/short review/renewal of credit facilities without justifiable reasons."
The SMA Framework: Catching Stress Before Default
The Special Mention Account framework — first introduced in the June 2019 Prudential Framework and now embedded in the Commercial Banks Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti) — creates an early warning system with three tiers. SMA-0 triggers at 1 day overdue. SMA-1 at 31 days. SMA-2 at 61 days. For revolving facilities like cash credit and overdraft, the classification tracks the outstanding balance against the sanctioned limit rather than instalment arrears.
The June 2019 Prudential Framework (RBI/2018-19/203) (since withdrawn) established the architecture that survives in the November 2025 consolidation:
"Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA)."
Banks must report SMA classifications monthly to the Central Repository of Information on Large Credits (CRILC) for all borrowers with aggregate exposure of Rs 5 crore and above. The data feeds the RBI's systemic stress monitoring — and makes it impossible for banks to quietly evergreen accounts across lenders without the regulator noticing.
System-Based Classification: Taking Discretion Away from Banks
The Commercial Banks IRAC Direction (Reserve Bank of India (Commercial Banks – Income R) mandates what decades of circulars could not achieve through persuasion: automated, system-driven NPA classification with no manual overrides.
"All loans, including temporary overdrafts, irrespective of size, sector or types of limits, shall be covered in the automated IT based system ('System') for asset classification, upgradation, and provisioning processes."
Asset classification rules must be configured in the system in compliance with regulatory stipulations. Provisioning calculations must be system-based, using pre-set rules for various asset categories. The SMA or NPA classification date is the calendar date for which the day-end process runs — not the date a human officer happens to review the file.
This is the reform that finally closes the gap between what the rules say and what banks do. When the system runs the day-end process and a loan is 91 days overdue, it classifies as NPA regardless of whether the branch manager believes the borrower will pay next week.
The Provisioning Architecture
Once classified, provisioning escalates. The June 2004 unsecured advances circular (since withdrawn) defined the key threshold:
"'Unsecured exposure' is defined as an exposure where the realisable value of the security is not more than 10 percent, ab-initio, of the outstanding exposure."
Unsecured substandard assets attract 20% provisioning versus 10% for secured. Unsecured doubtful assets get 100%. The June 2006 floating provisions circular (RBI/2005-06/421) (since withdrawn) stopped banks from using floating provisions to smooth profits:
"The use of floating provisions to set-off against provisions required to be made as per extant prudential guidelines appear to have been used in smoothening of profits in some cases."
Floating provisions cannot be reversed by credit to the profit and loss account. They can only be used for contingencies under extraordinary circumstances with prior RBI permission. The April 2011 Provisioning Coverage Ratio (RBI/2010-11/485) (since withdrawn) built the counter-cyclical buffer at 70% of gross NPAs — forcing banks to provision heavily during good years so they would not face a cliff when the cycle turned.
The June 2019 Prudential Framework: One Framework to Replace Them All
The Prudential Framework for Resolution of Stressed Assets (since withdrawn) replaced CDR, SDR, S4A, JLF, and the Supreme Court-struck February 2018 circular with a single resolution mechanism. A 30-day review period begins from first default. Lenders must enter an Inter-Creditor Agreement requiring 75% by value and 60% by number. Resolution must be implemented within 180 days from the end of the review period, with 20% additional provisioning if breached, escalating to 35% at 365 days.
The anti-evergreening warning embedded in the current Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti) carries real teeth:
"Any action by a bank with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties."
The November 2025 Consolidation
All the historical circulars — RBI_1706, RBI/2005-06/421, RBI/2009-10/168, RBI/2010-11/485 — were consolidated into entity-specific directions. The Commercial Banks Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti) alone has 90 downstream references. The IRAC Direction (Reserve Bank of India (Commercial Banks – Income R) governs income recognition, asset classification, and provisioning. Together they form the current architecture — the withdrawn circulars remain the record of how each norm originated and why it was needed.
The June 2019 Prudential Framework was announced alongside: RBI releases Prudential Framework for Resolution of Stressed Assets (PR_47248).
Read the Full Story
- The 90-Day Rule That Took Twenty Years to Enforce — how the NPA recognition standard evolved from committee recommendation to automated mandate
- What Happens After a Loan Goes Bad — the journey from NPA classification to ARC sale to IBC resolution
- How SARFAESI Gave Banks Power Without Courts — the collateral seizure framework that changed loan recovery
- What Happens to a Wilful Defaulter — the framework banks use to name, shame, and restrict
- Why Banks Must Report Fraud Within 7 Days — and what happens when they do not
Governing Direction: Reserve Bank of India (Commercial Banks -- Resolution of Stressed Assets) Directions, 2025 (Reserve Bank of India (Commercial Banks – Resoluti)
Last updated: April 2026