Small Finance Banks Income Recognition Asset Classification and Provisioning Directions 2025

RBI/DOR/2025-26/195 DOR.STR.REC.114./21.04.048/2025-26 November 28, 2025 Previous Versions Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 (Updated as on July 01, 2026)

Table of Contents Chapter I - Preliminary A. Short title and commencement B. Applicability C. Definitions

Chapter II - General Instructions A. Role of the Board B. Prudence in Lending and Consumer Education C. Disclosure Requirements

Chapter III - Asset Classification A. General Instructions on Asset Classification B. Automation of Income Recognition, Asset Classification and Provisioning processes A. Classification as non-performing asset C. Accounts regularised near about the balance sheet date D. Specific cases of asset classification E. Categories of non-performing assets F. Upgradation of loan accounts classified as NPAs

Chapter IV - Provisioning Norms A. General Principles for Provisioning B. Provisions in respect of Standard assets B1. Additional specific provisioning in case of resolution plan implemented under Chapter VI-A of the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025 C. Provisions in respect of substandard assets D. Provisions in respect of Doubtful Assets E. Provisions in respect of Loss Assets F. Prudential norms on creation and utilisation of floating provisions G. Additional Provisions at higher than prescribed rates H. Provisions under Special Circumstances I. Provisioning Coverage Ratio (PCR)

Chapter V - Income Recognition A. General Principles for Income Recognition B. Reversal of income upon classification as NPA C. Interest application after NPA classification D. Appropriation of recovery from NPAs E. Income recognition in special cases F. Tax treatment in respect of provisions

Chapter VI - Repeal and Other Provisions A. Repeal and saving B. Application of other laws not barred C. Interpretations

Annex - I

Introduction Reserve Bank of India (‘Reserve Bank’) is statutorily mandated to operate the credit system of the country to its advantage. In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of banks so as to move towards greater consistency and transparency in the published accounts.

In exercise of powers conferred by Sections 21, and 35A of the Banking Regulation Act, 1949, the Reserve Bank being satisfied that it is necessary and expedient in the public interest so to do, hereby issues these Directions hereinafter specified.

Chapter I - Preliminary

A. Short title and commencement

1. These directions shall be called the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025.
2. These directions shall come into force with immediate effect.

B. Applicability 3. These Directions shall be applicable to Small Finance Banks (hereinafter collectively referred to as ‘banks’ and individually as a ‘bank’). 4. A bank shall also follow the prudential guidelines on income recognition, asset classification and provisioning of advances for restructured accounts as prescribed in the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025, in addition to these Directions.

C. Definitions 5. In these Directions, unless the context states otherwise, the terms herein shall bear the meaning assigned to them below:

• (1) ‘crop season’ for each crop, shall mean the period up to harvesting of the crops raised, as determined by the State Level Bankers’ Committee (SLBC) in each State;
• (2) ‘doubtful asset’ shall mean an asset which has remained in the substandard category for a period of twelve months;
• (3) ‘exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments).
• (4) ‘long duration crops’ shall mean crops with crop season longer than one year;
• (5) ‘loss asset’ shall mean an asset where loss has been identified by a bank or internal or external auditors or the inspection conducted by the Reserve Bank, but the amount has not been written off wholly by the bank;
• (6) ‘non-performing asset’ shall mean an asset, including a leased asset, which has ceased to generate income for a bank;
• (7) ‘out of order status’– a cash credit / overdraft (CC / OD) account shall be treated as ‘out of order’ if any of the following conditions are satisfied:
  • (i) the outstanding balance remains continuously in excess of the sanctioned limit / drawing power for 90 days;
  • (ii) the outstanding balance is less than the sanctioned limit / drawing power but there are no credits continuously for 90 days;
  • (iii) 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.

Explanation 1: ‘Previous 90 days period’ referred to in (iii) above shall be inclusive of the day for which the day-end process is being run.

Explanation 2: The definition of ‘out of order’ shall be applicable to all credit products being offered as an overdraft facility, including those not meant for business purpose and / or which entail interest repayments as the only credits.

• (iv) ‘overdue’ status – any amount due to a bank under any credit facility shall be treated as ‘overdue’ if it is not paid on the due date fixed by the bank.
• (v) ‘provisioning coverage ratio (PCR)’ shall mean the ratio of provisioning to gross non-performing assets and indicates the extent of funds kept aside to cover loan losses;
• (vi) ‘security’ shall mean tangible security properly charged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters, etc.
• (vii) ‘short duration crops’ shall mean crops which are not ‘long duration’ crops;
• (viii) ‘substandard asset’ shall mean an asset, which has remained NPA for a period less than or equal to twelve months;
• (ix) ‘unsecured exposure’ shall mean an exposure where the realisable value of the security, as assessed by a bank / approved valuers / the Reserve Bank’s inspecting officers, is not more than ten percent, ab-initio, of the outstanding exposure.

(8) The definitions of the terms 'Micro Enterprises', 'Small Enterprises', and 'Medium Enterprises' shall be in terms of the circular FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020 on 'Credit flow to Micro, Small and Medium Enterprises Sector' as updated from time to time.

(9) The terms ‘credit event’ and ‘default’ shall have the same meaning as assigned to it in the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025.

(10) The terms ‘Commercial Real Estate (CRE)’, ‘Commercial Real Estate – Residential Housing Sector (CRE - RH)’, ‘project finance’, and ‘financial closure’ shall have the same meaning assigned to them in the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025.

(11) All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934, or the Companies Act, 2013, or any statutory modification or re-enactment thereto or other regulations issued by the Reserve Bank or the Glossary of Terms published by the Reserve Bank or as used in commercial parlance, as the case may be.

Chapter II - General Instructions

A. Role of the Board 6. A bank shall frame a Board approved policy for the implementation of the regulations contained in this Chapter, which shall inter alia include the following principles / components:

• (1) the policy of income recognition shall be objective and based on record of recovery rather than on any subjective considerations;
• (2) the policy shall specify the level to which the floating provisions can be created;
• (3) circumstances which would be considered as extraordinary for the utilization of floating provisions for making specific provisions in impaired accounts;
• (4) policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors;
• (5) guidelines for appointment of external agencies for stock audit and valuation of collateral;
• (6) policy on methodology and periodicity for review / renewal of credit facilities within the overall regulatory guidelines;
• (7) delegation of powers for authorising the exceptions to automation of Income Recognition, Asset Classification and Provisioning processes.

7. The Board of Directors of a bank shall take all necessary steps to arrest the deteriorating asset quality in the books and focus on improving the credit risk management system. Early recognition of problems in asset quality and resolution requires a bank to be proactive and make use of Central Repository of Information on Large Credits (CRILC).

B. Prudence in Lending and Consumer Education 8. A bank shall ensure that realistic repayment schedules are fixed on the basis of cash flows in consultation with borrowers while granting loans and advances, to facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances.

9. A bank shall comply with the following instructions in respect of all loans sanctioned on or after December 31, 2021:

• (1) The exact due dates for repayment of a loan, frequency of repayment, breakup between principal and interest, examples of dates of classification as special mention account (SMA) / non-performing asset (NPA), etc. shall be clearly specified in the loan agreement;
• (2) The borrower shall be apprised of the same at the time of loan sanction and also at the time of subsequent changes, if any, to the sanction terms / loan agreement till full repayment of the loan;
• (3) In cases of loan facilities with moratorium on payment of principal and / or interest, the exact date of commencement of repayment shall also be specified in the loan agreements.

10. In case of loans sanctioned before December 31, 2021, compliance to the instructions in paragraph 9 shall be ensured as and when such loans become due for renewal / review.

11. A bank shall apply the following principles in respect of working capital accounts sanctioned by them:

• (1) Ensure that drawings in the working capital accounts are covered by the adequacy of current assets.
• (2) Drawing power shall be arrived at based on the stock statement which is current.
• (3) Notwithstanding sub-paragraph (2) above, considering the difficulties of large borrowers, stock statements relied upon by a bank for determining drawing power should not be older than three months.
• (4) The outstanding in the account based on drawing power calculated from stock statements older than three months, shall be deemed as irregular.

12. Regular and ad hoc credit limits shall be reviewed / regularised not later than three months from the due date / date of ad hoc sanction.

13. In case of constraints such as non-availability of financial statements and other data from the borrowers, a bank should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon.

14. A bank shall strictly adhere to the Board approved policy on methodology and periodicity for review / renewal of credit facilities within the overall regulatory guidelines.

15. A bank shall avoid frequent and repeated ad-hoc / short review / renewal of credit facilities without justifiable reasons.

16. A bank shall capture all the data relating to regular as well as ad-hoc / short review / renewal of credit facilities in its core banking systems / management information systems and make the same available for scrutiny as and when required by any audit or inspection by Auditors / the Reserve Bank. Further, the processes governing review / renewal of credit facilities should be brought under the scope of concurrent / internal audit / internal control mechanism of the bank.

17. Notwithstanding paragraph 13, delay beyond six months is not considered desirable as a general discipline.

18. Stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board shall be mandatory in cases of NPAs with balance of ₹5 crore and above in order to enhance the reliability on stock valuation and bring down divergence arising out of difference in assessment of the value of security.

19. In case of NPAs with balance of ₹5 crore and above, collateral such as immovable properties charged in favour of the bank shall be valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.

20. A bank shall seek explanation from advocates who wrongly certify as to clear legal titles in respect of assets or valuers who overstate the security value, by negligence or connivance, and if no reply / satisfactory clarification is received from them within one month, they may report their names to IBA. IBA may circulate the names of such advocates / valuers among its members for consideration before availing of their services in future. IBA would create a central registry for this purpose.

21. A bank shall implement the following instructions to increasing awareness among the borrowers:

• (1) place consumer education literature on its website, explaining with examples, the concepts of date of overdue, special mention account and non-performing asset classification and upgradation, with specific reference to day-end process;
• (2) consider displaying such consumer education literature in its branches by means of posters and / or other appropriate media;
• (3) ensure that front-line officers educate borrowers about all these concepts, with respect to loans availed by them, at the time of sanction / disbursal / renewal of loans.

C. Disclosure Requirements 22. A bank shall make suitable disclosures in its Notes to Accounts as per the requirements contained in the Reserve Bank of India (Small Finance Banks – Financial Statements: Presentation and Disclosures) Directions, 2025.