Bank & NBFC Provisioning — IRAC Norms vs Ind AS
Why India's largest banks, holding trillions of rupees in loans, don't actually follow the same accounting rulebook as the NBFCs and other companies sitting right next to them in the same stock market index.
In plain English
Recall from the Expected Credit Loss article that Ind AS 109 requires lenders to provide for expected future loan losses on a forward-looking basis, even for perfectly-performing loans. Here's a genuinely important twist specific to India: commercial BANKS haven't actually adopted this rule at all. Despite Ind AS being mandatory for most large Indian companies, including NBFCs, the Reserve Bank of India has repeatedly deferred Ind AS implementation for the banking sector, meaning India's banks continue to provision for bad loans using an entirely different, older, more India-specific framework — the RBI's own Income Recognition and Asset Classification, or IRAC, norms.
Words you'll need first
A regulatory framework set by the Reserve Bank of India, applicable specifically to banks, that classifies loans into categories — Standard, Substandard, Doubtful, and Loss — based primarily on how many days a payment is OVERDUE, with prescribed MINIMUM provisioning percentages tied to each category. This is fundamentally a BACKWARD-LOOKING, rules-based system, closer in spirit to the pre-2018 'incurred loss' model than to Ind AS 109's forward-looking approach.
A loan on which interest or principal repayment has remained overdue for a specified period — typically 90 days under RBI norms — after which the bank must stop recognising interest income on it and must provide for a prescribed minimum percentage of the outstanding amount as a loss provision, increasing the longer the loan remains non-performing.
Two genuinely different provisioning philosophies, side by side
IRAC Norms (Banks)
Provisioning is triggered primarily by ACTUAL, observed payment delinquency — a loan generally doesn't require significant provisioning until it's genuinely overdue by 90 days or more. This is a largely backward-looking, rules-based, regulator-prescribed system.
Ind AS 109 (NBFCs and other Ind AS filers)
Provisioning begins the moment a loan is originated, based on statistically-modelled Probability of Default and Loss Given Default, and increases in stages as credit risk deteriorates — well before an actual 90-day overdue trigger is reached. A forward-looking, model-and-judgement-driven system.
A worked example, with numbers
| Item | Bank (IRAC Norms) | NBFC (Ind AS 109 ECL) |
|---|---|---|
| ₹50 crore of loans showing early stress (not yet 90 days overdue) | Likely still classified as Standard — minimal provisioning required | Likely moves from Stage 1 to Stage 2 — meaningfully HIGHER provisioning required immediately |
| Approximate provisioning treatment | Modest, standard-asset-level provisioning | Materially higher, lifetime-expected-loss-based provisioning |
- On the EXACT SAME ₹50 crore of stressed loans, the bank's IRAC-based provisioning stays relatively modest, since the loans haven't yet crossed the 90-day overdue threshold that would trigger meaningfully higher required provisioning.
- The NBFC, applying Ind AS 109's forward-looking ECL model, would likely need to recognise a materially higher provision on this SAME pool of loans, purely because its own credit risk assessment has already deteriorated.
- This means a bank's reported profit and asset quality metrics can, in a genuinely deteriorating credit environment, temporarily look BETTER than an NBFC's on an economically comparable loan book, purely due to WHEN provisioning is triggered.
- This gap tends to narrow, and sometimes reverse, once loans actually DO cross the 90-day overdue threshold — IRAC norms can require quite steep, prescribed provisioning increases as a loan's non-performing status ages.
What it does to the financial statements
Impact on the P&L
- A bank's provisioning expense under IRAC norms is driven primarily by actual, observed loan delinquency crossing specific day-count thresholds, creating a more 'lagging', event-triggered pattern compared to an NBFC's forward-looking, continuously-adjusting ECL charges.
- This structural difference means bank and NBFC profit trends can diverge meaningfully during a credit cycle turn — an NBFC's profit may show earlier, gradual provisioning-driven pressure, while a bank's profit may hold up longer before a sharper, concentrated hit.
- Analysts and investors comparing Price-to-Book across banks and NBFCs need to be aware that the underlying 'book' is calculated using genuinely different provisioning philosophies for the two categories of lender.
- SEBI and RBI have introduced various supplementary disclosure requirements, like the NPA divergence framework covered in the Accounting Policies, Estimates & Errors article, partly to help bridge this comparability gap.
Impact on the Balance Sheet
- A bank's loan book on its balance sheet is shown net of IRAC-based provisions, which can differ meaningfully in timing and philosophy from the Ind AS 109 ECL-based provisions an NBFC would hold against an economically similar book.
- Capital adequacy ratios — a bank-specific regulatory solvency measure — are calculated using IRAC-based net worth figures for banks, meaning a bank's regulatory capital position is directly shaped by this specific provisioning framework, not by Ind AS 109.
- The RBI has, at various points, signalled an eventual intention to move Indian banks toward an Ind AS-aligned provisioning framework, but has repeatedly deferred formal implementation, citing systemic stability and sector-readiness considerations.
- For investors specifically comparing balance sheet strength across banks and NBFCs, understanding which provisioning framework underlies each institution's reported net worth is a genuinely important, foundational piece of context.
Which standard covers this
In India, commercial banks are governed by the Reserve Bank of India's Income Recognition, Asset Classification and Provisioning (IRAC) norms, rather than by Ind AS 109. NBFCs, housing finance companies, and other Ind AS-reporting lenders instead follow Ind AS 109 – Financial Instruments, the same standard covered in the Expected Credit Loss article.
How it's recognised globally
This specific bank-versus-other-lender divergence is largely an India-specific regulatory phenomenon, rather than a standard cross-border difference. In most other major markets — including under IFRS globally and under US GAAP's CECL framework in the United States — BANKS themselves are typically subject to the SAME forward-looking expected-credit-loss-style provisioning framework as other lenders, without the kind of parallel, bank-specific regulatory carve-out that persists in India. This makes India something of an outlier: Indian banks' provisioning remains governed by RBI's own IRAC framework even as the rest of corporate India, including NBFCs competing directly with banks for lending business, has moved to the internationally-aligned Ind AS 109 ECL approach.
Real example — Indian listed company
State Bank of India, India's largest bank, continues to report its provisioning and asset quality under RBI's IRAC norms, exactly as this article describes for all Indian banks, while Bajaj Finance, one of India's largest NBFCs and already featured in the Expected Credit Loss article for its Ind AS 109-based provisioning practice, follows the fundamentally different, forward-looking ECL framework. Both institutions are large, systemically important, closely-watched lenders sitting in the same broad financial services space — yet their headline provisioning figures, and the accounting philosophy generating them, are genuinely not directly comparable without adjustment, exactly as this article explains. This real, ongoing divergence between how India's single largest bank and one of its largest NBFCs account for essentially the same underlying activity is one of the more distinctive, genuinely India-specific quirks in the country's financial reporting landscape.
Where you'll see this
Related concepts
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