Introduction
A borrower may have several facilities with the same bank, such as:
Cash Credit;
Term Loan;
Overdraft;
Bank Guarantee;
Letter of Credit; and
investments made by the bank in securities issued by that borrower.
If one facility becomes non-performing, can the bank continue showing the other facilities as standard?
The general RBI principle is No.
Asset classification is normally borrower-wise and not facility-wise.
At the same time, every temporary irregularity in an account does not immediately make it an NPA. RBI separately recognises temporary deficiencies, such as a temporary excess over limit or non-renewal exactly on the due date.
These two concepts are frequently confused and are important for CAIIB case-based questions.
The 2026 IIBF BFM syllabus includes Asset Classification and Provisioning Norms in Module D. As of September 2026, RBI’s applicable Commercial Banks IRAC Directions are the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, updated as on July 1, 2026.
Learning Objectives
After studying this topic, you should be able to:
explain the borrower-wise asset-classification principle;
understand how NPA status affects multiple facilities of one borrower;
identify important exceptions to borrower-wise classification;
distinguish a temporary deficiency from an NPA-triggering irregularity;
apply stock-statement, drawing-power and renewal rules correctly; and
identify artificial regularisation near the balance-sheet date.
What Is Borrower-Wise Classification?
RBI requires asset classification to be borrower-wise rather than facility-wise.
If one facility of a borrower becomes NPA, the bank normally has to classify:
all credit facilities granted to that borrower; and
investments in securities issued by that borrower
as NPA or NPI, as applicable.
The reason is practical.
If a borrower cannot service one material obligation to the same bank, it is generally inappropriate to treat another facility of the same borrower as completely healthy merely because that particular account is presently regular.
Example of the Borrower-Wise Principle
Suppose a company has the following facilities with Bank A:
Facility | Position |
|---|---|
Term Loan | NPA |
Cash Credit | Regular |
Bank Guarantee | No devolvement |
Another Term Loan | Regular |
A facility-wise approach would classify only the first term loan as NPA.
That is generally incorrect.
Under borrower-wise classification, all applicable facilities of that borrower with Bank A are treated according to the borrower’s NPA status.
This does not mean that every lender in the banking system must necessarily classify the borrower identically. The classification in another bank may depend on that bank’s own recovery record and applicable regulatory rules.
Devolved LCs and Invoked Guarantees
Sometimes a devolved Letter of Credit or invoked guarantee is transferred to a separate account.
Creating a separate account does not isolate that liability from the borrower.
RBI requires debits arising from:
devolvement of LCs; or
invocation of guarantees
that are parked separately to be treated as part of the borrower’s principal operating account for applying IRAC norms.
Therefore, a bank cannot avoid the proper asset-classification consequence merely by moving the amount into another ledger or account.
Why Borrower-Wise Classification Matters
The principle prevents a bank from presenting an incomplete picture of the borrower’s credit quality.
Consider a borrower who has:
₹10 crore term loan;
₹15 crore Cash Credit; and
₹5 crore another funded facility.
If severe repayment weakness causes one facility to become NPA, treating only that small component as NPA could understate the bank’s actual credit problem.
Borrower-wise classification makes recognition more consistent with the borrower’s overall repayment capacity.
Important Exceptions to Borrower-Wise Classification
The borrower-wise rule is important, but it should not be applied mechanically where RBI provides a specific exception.
Bills Discounted under Letter of Credit
A bill discounted under an LC in favour of a borrower need not automatically become NPA merely because another facility granted to that borrower has become NPA.
However, the protection is conditional.
If:
documents under the LC are not accepted on presentation; or
the issuing bank does not make payment on the due date; and
the borrower does not immediately make good the amount,
the outstanding bill must be classified as NPA with effect from the date on which the borrower’s other facilities had become NPA.
This is a classic CAIIB exception.
Consortium Advances
Where several banks lend under a consortium, asset classification is based on the record of recovery of each individual member bank and other factors affecting recoverability.
Suppose the borrower pays the lead bank, but the lead bank does not transfer another member’s share.
If that member bank has not received its share and does not have appropriate arrangements or consent, the account can be treated as not serviced in that member’s books.
Therefore:
Borrower-wise within one bank does not mean automatic lender-wise uniformity across all consortium members.
PACS and FSS On-Lending Arrangements
RBI also provides specific treatment for certain advances to Primary Agricultural Credit Societies and Farmers’ Service Societies under on-lending arrangements.
In these specified cases, only the particular credit facility in default for the applicable crop-season period is classified as NPA rather than automatically classifying every facility to the PACS/FSS.
What Are Temporary Deficiencies?
A temporary deficiency is an irregularity that does not, by itself, justify immediate NPA classification.
RBI states that classification should be based on the record of recovery and that an advance should not be classified as NPA merely because of temporary deficiencies such as:
temporary non-availability of adequate drawing power;
temporary excess over the sanctioned limit;
non-submission of stock statements; or
non-renewal of limits exactly on the due date.
The important word is temporary.
A temporary deficiency can become serious when it continues beyond prescribed regulatory conditions.
Temporary Excess over Limit
Suppose a CC limit is ₹50 lakh.
For a short period, the account balance increases to ₹52 lakh.
This temporary excess does not automatically make the account NPA.
The bank must determine whether the account satisfies the applicable out-of-order or other NPA conditions.
Therefore:
Temporary excess ≠ immediate NPA
However, if the irregular position continues and satisfies the applicable regulatory test, NPA classification may follow.
Stock Statements and Drawing Power
Drawing Power (DP) in a working-capital account should be based on current assets supported by a current stock statement.
RBI provides that stock statements relied upon for determining DP should not be older than three months. If DP is calculated on the basis of a stock statement older than three months, the outstanding based on that DP is treated as irregular.
This creates an important sequence:
Stock Statement Becomes Older Than 3 Months → DP Becomes Stale → Drawing Becomes Irregular
But this does not mean that the account becomes NPA immediately on the day the stock statement crosses three months.
The working-capital account becomes NPA if such irregular drawings are permitted for a continuous period of 90 days, even if:
the unit is working; or
the borrower’s financial position otherwise appears satisfactory.
Concept Example
Suppose a borrower has not submitted a fresh stock statement.
The bank continues calculating DP from a statement older than three months.
The correct approach is:
recognise that the DP is based on a stale stock statement;
treat the resulting drawing as irregular;
monitor the period of continuous irregularity; and
classify the account as NPA when the prescribed 90-day condition is satisfied.
Non-Renewal of Credit Limits
Working-capital limits normally require periodic review or renewal.
RBI requires regular and ad hoc credit limits to be reviewed or regularised not later than three months from the due date or date of ad hoc sanction.
However, non-renewal exactly on the due date does not automatically make the account NPA.
Where genuine constraints such as non-availability of financial statements exist, the bank should be able to show that the renewal or review process is already underway.
RBI also states that delay beyond six months is not considered desirable as a general discipline. An account where the regular or ad hoc limit has not been reviewed or renewed within 180 days from the due date or date of ad hoc sanction is treated as NPA.
Three Months vs 180 Days
This distinction is highly exam-relevant.
Period | Meaning |
|---|---|
Up to 3 months from due date | RBI expects review/regularisation within this period |
Delay beyond 3 months | Review discipline has not been met; evidence of ongoing review becomes important |
Beyond 180 days | Account is treated as NPA under the specific RBI rule |
Do not conclude that the account automatically becomes NPA immediately after three months merely because RBI expects review within that period.
Temporary Deficiency vs NPA Trigger
Situation | Regulatory Interpretation |
|---|---|
Balance temporarily exceeds limit | Not NPA merely for this reason |
Stock statement temporarily not submitted | Not immediate NPA |
Stock statement used for DP is older than 3 months | Drawing becomes irregular |
Such irregular drawing continues for 90 days | NPA |
Limit not renewed exactly on due date | Not immediate NPA |
Limit remains unreviewed/unrenewed for 180 days | NPA |
Temporary inadequacy of DP | Not immediate NPA |
Applicable out-of-order condition is satisfied | NPA |
The basic lesson is:
Temporary deficiency must be distinguished from continuation of that deficiency beyond a regulatory trigger.
Accounts Regularised Near the Balance-Sheet Date
Suppose a weak account receives one large credit just before March 31 and appears regular on the balance-sheet date.
Should it automatically remain standard?
No.
RBI requires accounts having a solitary or few credits shortly before the balance-sheet date to be handled carefully and without subjectivity.
If available information shows inherent weakness, the account should be treated as NPA.
Where regularisation is genuine, the bank should be able to provide satisfactory evidence to statutory auditors or inspecting officers regarding the manner of regularisation.
This rule helps prevent window dressing and artificial regularisation.
Availability of Security Does Not Cure NPA Status
Another common conceptual error is to say:
“The account is fully secured, therefore it should remain standard.”
RBI’s general rule is that the availability of security or the net worth of the borrower or guarantor should not determine whether an advance is NPA, except where the Directions specifically provide otherwise.
Asset classification is primarily linked to performance and recovery.
Security becomes highly relevant when determining:
provisioning;
recoverability;
enforcement strategy; and
possible direct classification as doubtful or loss where severe security erosion exists.
But good collateral does not ordinarily convert a defaulting exposure into a performing asset.
Borrower-Wise Upgradation
Borrower-wise treatment also affects upgradation.
RBI permits an NPA loan to be upgraded to standard only when the entire arrears of interest and principal are paid.
Where the borrower has more than one credit facility with the bank, the facilities can be upgraded from NPA to standard only after the borrower clears the entire arrears of principal and interest pertaining to all credit facilities.
Example
A borrower has:
Term Loan A – arrears cleared;
Term Loan B – arrears still unpaid; and
CC – also classified NPA under borrower-wise treatment.
Clearing only Term Loan A does not normally restore the borrower to standard status.
The remaining arrears must also satisfy the regulatory upgradation requirement.
Borrower-Wise Classification in Automated Systems
RBI requires system-based asset classification to take into account all facilities availed by a given customer, even where those facilities are maintained across different systems of the bank.
The updated classification must flow into the Core Banking System through straight-through processing, without unnecessary manual intervention.
This is operationally important.
A bank cannot correctly implement borrower-wise classification if:
the same borrower has different customer IDs;
facilities are not properly linked;
data is incomplete; or
separate systems do not communicate correctly.
Correct customer mapping is therefore an important control in IRAC compliance.
Practical Banking Application
Consider four situations at a branch.
Situation 1: Term Loan Becomes NPA, CC Is Regular
The borrower has a term loan and a CC account with the same bank.
The term loan becomes NPA.
The branch should not simply leave the CC account standard because it is currently operating within limit. The borrower-wise classification rule must be applied.
Situation 2: CC Temporarily Exceeds Limit
The account exceeds its sanctioned limit for a short period.
Do not classify it as NPA merely because of the temporary excess.
Check whether the applicable out-of-order or other regulatory NPA condition has actually been satisfied.
Situation 3: Stock Statement Is Old
The DP is based on a stock statement older than three months.
The drawing becomes irregular.
If this irregular position continues for 90 days, the NPA condition arises.
Situation 4: Limit Renewal Is Delayed
Renewal falls due, but financial statements are awaited.
The account does not become NPA merely on the renewal due date.
The bank should document the review process and complete it promptly. If the limit remains unreviewed or unrenewed for 180 days from the relevant date, the account is treated as NPA.
These examples show the difference between:
Temporary Operational Deficiency and Regulatory NPA Trigger.
CAIIB Exam Focus
1. Classification Is Generally Borrower-Wise
If one facility becomes NPA, check the borrower’s other facilities with the same bank.
2. Investments Are Also Relevant
The rule extends to investments by the bank in securities issued by the borrower, subject to applicable regulatory treatment.
3. Separate Accounts Do Not Automatically Avoid the Rule
Devolved LCs or invoked guarantees parked in another account remain relevant to the borrower’s overall exposure.
4. LC-Discounted Bills Have a Specific Exception
Do not apply the general borrower-wise rule without checking the LC conditions.
5. Consortium Members Use Their Own Recovery Record
The same borrower can have different classification outcomes across banks depending on actual servicing and applicable rules.
6. Temporary Excess Is Not Immediate NPA
The prescribed period and relevant NPA condition must be satisfied.
7. Remember “3 Months → 90 Days”
For stock statements:
Older than 3 months → drawing irregular
Irregular drawing continuously for 90 days → NPA
8. Remember “3 Months vs 180 Days” for Renewal
Three months relates to expected review/regularisation discipline.
180 days without review/renewal is the NPA trigger.
9. Balance-Sheet-Date Credits Need Scrutiny
A solitary last-minute credit should not conceal inherent weakness.
10. Upgradation Is Also Borrower-Wise
Entire arrears across the borrower’s credit facilities must normally be cleared before standard classification is restored.
Common Exam Traps
Trap 1: “Only the Defaulting Facility Becomes NPA”
Generally wrong. Asset classification is borrower-wise, subject to specific exceptions.
Trap 2: “Borrower-Wise Means Every Bank Must Classify the Borrower Identically”
Wrong. In consortium lending, each member considers its own recovery record and relevant circumstances.
Trap 3: “Any Temporary Excess Makes a CC Account NPA”
Wrong. Temporary excess alone is specifically recognised as a temporary deficiency.
Trap 4: “An Old Stock Statement Immediately Makes the Account NPA”
Wrong. A stock statement older than three months makes drawing based on that DP irregular; continuous irregular drawing for 90 days creates the relevant NPA condition.
Trap 5: “Limit Not Renewed within Three Months Means Immediate NPA”
Not necessarily. Three months is the prescribed review/regularisation discipline. The specific NPA trigger is failure to review/renew within 180 days.
Trap 6: “A Large Credit on March 31 Automatically Makes the Account Standard”
Wrong. The bank must examine whether regularisation is genuine or whether inherent weakness continues.
Trap 7: “Strong Security Prevents Borrower-Wise NPA Classification”
Wrong. Asset classification is based mainly on recovery performance, not collateral value.
Trap 8: “One Facility Is Cleared, So the Borrower Can Be Upgraded”
Wrong where arrears remain in other facilities of the same borrower.
Memory Technique
Remember:
B-W-E
B = Borrower-wise
W = Whole borrower relationship
E = Exceptions must be checked
For temporary deficiencies, remember:
3 – 90 – 180
3 months → maximum age of stock statement used for DP
90 days → continuous irregular drawing can lead to NPA
180 days → unreviewed/unrenewed limit becomes NPA
This sequence is useful for CAIIB case-based questions.