IRAC NormsIRAC

IRAC stands for Income Recognition and Asset Classification — the set of RBI rules that tell every bank, uniformly, when it must stop counting a loan's interest as income. It also spells out how to classify and provide against bad loans.

IRAC is the rulebook that makes everything else in this cluster non-negotiable. Banks would love to keep showing interest income on a loan that's quietly stopped paying — IRAC forbids it. It's the reason NPAs, classification, and provisioning are mechanical and consistent across all banks, rather than each bank flattering its own books. For anyone in credit, audit, or compliance, IRAC is the framework auditors and RBI inspectors check you against — knowing it is knowing the rules of the game.

The "income recognition" half is the part people miss. Take a ₹1 crore loan at 10% (illustrative):

• While standard, the bank books ₹10 lakh/year of interest as income — even portions not yet received.
• The day it turns NPA, IRAC says: stop. No more interest can be recognised as income, and any interest booked earlier but not actually received must be reversed out of income.

So an NPA hits the bank twice: it loses future interest income and the bank must claw back interest it had already counted. Combined with the provisioning charge, that's why a single large NPA can swing a quarter from profit to loss.

IRAC is the umbrella over the whole NPA cluster: it defines the SMA early-warning stages, the 90-day NPA trigger, the classification ladder, and the provisioning that follows. If you understand IRAC, the rest of the cluster is just its consequences.