The audit of advances is where most of the real work happens in a statutory bank branch audit — most of the time is spent here, and most of the professional risk lies here. Yet it is also the area where the regulatory framework is read selectively. The standard provisions are well-known, but the specific situations buried deeper in the same documents are routinely missed.
This piece is grounded in the RBI (Commercial Banks — Income Recognition, Asset Classification and Provisioning) Directions, 2025 (IRACPD) dated November 28, 2025 and the ICAI Guidance Note on Audit of Banks (2026 Edition) — the operative references for FY 2025-26 bank branch audits.
Whether you’re doing your first bank audit or your fifteenth, these are the provisions that can make the difference between a routine audit and one that actually catches what matters.
The NPA Classification Framework in Brief
Before getting into the specifics, here’s the baseline framework that every auditor starts with:
| Facility Type | NPA Trigger |
|---|---|
| Term Loans | Interest or principal instalment overdue beyond 90 days |
| CC/OD Accounts | Outstanding continuously exceeds sanctioned limit or drawing power for 90 days, or interest not regularly serviced |
| Agricultural loans (short-duration crops) | Overdue after two crop seasons from due date |
| Agricultural loans (long-duration crops) | Overdue after one crop season from due date |
NPA classification is borrower-wise — if any one facility of a borrower is NPA, all other facilities of that borrower become NPA. Classification flows from Sub-standard → Doubtful (D1, D2, D3) → Loss, with provisioning rates increasing correspondingly.
That is the framework. What follows is about what the regulations say when this standard framework meets specific situations that practice tends to overlook.
Can CBS Be Manipulated to Prevent NPA Classification? Yes — and Here Is How
The assumption that automated NPA identification makes CBS outputs trustworthy is one of the more dangerous assumptions in bank branch audit. The ICAI Guidance Note specifically documents manipulation techniques that have actually been observed in banks.
The most basic technique: CBS has an NPA identification flag at account level that can be set to ‘No’, excluding that account from the daily NPA run entirely. The account continues showing Standard in all reports regardless of how many days it is overdue.
More sophisticated patterns use internal accounts as conduits — debiting a GL head like ‘Other Liabilities’ and crediting the overdue loan account, marking it Standard, then reversing the office entry days later with no actual recovery.
Entries passed in ‘correction mode’ are another documented technique — one leg appears in the account statement, the correction entry does not, and the IRAC flag changes while the balance stays the same.
What IRACPD requires: Every manual override requires two-level authorisation, must be logged with date, time and user ID, and logs must be maintained for three years.
Practical audit step: Request the list of days when the NPA identification module was not run — particularly around quarter-ends. Also request the exception report showing all manual overrides during the audit period.
Accounts Regularised Just Before March 31 — Not All Credits Are Genuine
This is one of the most common NPA concealment techniques, and IRACPD addresses it directly.
Where an account shows a solitary credit or a few credits just before the balance sheet date, IRACPD requires classification without subjectivity:
- If the account shows inherent weakness on available data, it is NPA regardless of the last-minute credit
- If the regularising credit is through a cheque that subsequently bounces, it does not count at all for classification purposes
In CC/OD accounts, debit and credit entries in quick succession with no genuine business purpose — to show credit turnover — are a documented red flag in the ICAI Guidance Note.
In our experience building BankLens, we’ve seen that sorting transactions by date and amount in the last 15 days before March 31 often reveals patterns that are invisible in the standard account statement view.
Death of a Borrower — Classification Still Follows Recovery Record
Death alone is not a trigger for NPA classification. The account continues to be governed by the record of recovery:
- If dues are being serviced by legal heirs or the estate → account remains Standard
- If not → the 90-day clock runs from when dues became overdue, regardless of the borrower’s status
Consortium Accounts — Standard in Your Branch May Be NPA in Another Bank’s Books
NPA classification under consortium is based on the record of recovery in each member bank’s books independently. Where remittances are pooled with the lead bank and the lead bank is not transferring each member’s share, the account is technically unserviced in the member bank’s books and should be NPA there.
What the auditor must verify: The branch must independently confirm that its share of recovery was actually received and credited.
Security Erosion Above 50% or Below 10% — These Accounts Skip the Normal NPA Timeline
IRACPD prescribes a parallel classification track that bypasses the normal age-based progression entirely:
| Security Erosion Level | Classification Impact |
|---|---|
| Realisable value eroded by more than 50% | Account becomes Doubtful straightaway |
| Realisable value below 10% of outstanding | Account is Loss — 100% provision required |
Why CBS misses this: CBS does not track security erosion automatically. The auditor needs to independently verify current realisable value against the last assessed value.
LC Devolvement Parked Separately — Still Part of Borrower’s Exposure
Under IRACPD, the devolved amount must be treated as part of the borrower’s principal operating account for IRAC purposes.
Central Government Guaranteed Accounts — Standard for Classification, Cash Basis for Income
Central Government guaranteed advances are exempt from NPA classification — the account remains Standard regardless of overdue status. However, interest must be recognised on cash basis only — not on accrual basis.
The problem: CBS automatically accrues interest on all Standard accounts. So for Central Government guaranteed accounts, the interest reported as income is an overstatement that needs to be identified and reversed manually.
Upgradation From NPA — ‘No Overdue’ Is Not ‘Overdue Brought Within 90 Days’
For an NPA account to be upgraded to Standard, it must reach ‘no overdue’ status — meaning all accumulated arrears must be completely cleared. Simply bringing the overdue within the 90-day window is not sufficient.
Additionally, once classified as Doubtful, an account cannot be reclassified as Sub-standard — upgradation within NPA categories is not permitted.
Quick Mortality — A Finding With Institutional Consequences
Any advance that slips to NPA within 12 months of sanction is a quick mortality case. This triggers staff accountability.
Practical audit step: Obtain the list of all accounts sanctioned in the prior 12 months and verify their current classification status.
PACS/FSS On-Lending — An Explicit Exception to the Borrower-Wise Rule
For PACS and FSS on-lending advances, there is an explicit exception — only the specific facility in default becomes NPA, not all facilities. However, direct loans to the same entity follow the normal borrower-wise rule fully.
Jewel Loans for Agricultural Purposes — Crop Season Rule, Not 90 Days
Jewel loans taken for agricultural purposes are governed by crop season norms, not the 90-day rule. The auditor must verify the stated purpose of each jewel loan.
Summary: Key Audit Checks for Advances Under IRACPD 2025
| Area | What to Verify |
|---|---|
| CBS integrity | Manual override logs, NPA flag exceptions, days when NPA module was not run |
| Year-end regularisation | Solitary credits before March 31, cheque bounce status, round-tripping patterns |
| Consortium accounts | Independent verification of recovery receipts, not reliance on lead bank MIS |
| Security erosion | Current realisable value vs. last assessed value — 50% and 10% thresholds |
| Central Govt. guaranteed | Cash basis income recognition despite Standard classification |
| Upgradation | ‘No overdue’ requirement, not merely ‘within 90 days’ |
| Quick mortality | All accounts sanctioned within prior 12 months — current classification status |
| PACS/FSS | On-lending exception vs. borrower-wise rule for direct loans |
| Jewel loans (agri) | Purpose-based classification — crop season vs. 90-day rule |
| LC devolvement | Separate internal accounts included in borrower’s overall IRAC assessment |
Frequently Asked Questions
What is IRACPD 2025 and how does it affect bank branch audit for FY 2025-26?
IRACPD 2025 refers to the RBI (Commercial Banks — Income Recognition, Asset Classification and Provisioning) Directions, 2025, issued on November 28, 2025. It is the current operative framework for NPA classification, provisioning, and income recognition applicable to all commercial banks.
Can CBS systems be trusted for NPA classification?
CBS outputs should not be taken at face value. The ICAI Guidance Note documents several ways CBS can be manipulated. Auditors should independently verify NPA classification by examining override logs, exception reports, and transaction patterns around quarter-ends.
What is the difference between the 90-day NPA rule and crop season norms?
Standard advances become NPA after 90 days overdue. Agricultural advances for short-duration crops become NPA after two crop seasons, and long-duration crop advances after one crop season. The applicable norm depends on the purpose of the loan, not merely the product code.
When does security erosion override the normal NPA ageing timeline?
If realisable value has eroded by more than 50%, the account must be classified as Doubtful immediately. If below 10% of outstanding, it is classified as Loss with 100% provision.
Is there an automated tool to help CAs with NPA analysis during bank branch audit?
Yes. BankLens by NABS AI Solutions is a desktop-based offline tool specifically designed for bank branch audit, aligned with RBI IRACPD 2025 and the ICAI Guidance Note on Audit of Banks (2026 Edition).
Disclaimer: This article is for general informational purposes only and should not be treated as professional or legal advice. Readers are advised to verify the applicable provisions independently and consult a qualified professional for specific cases. NABS AI Solutions Pvt. Ltd. is not responsible for any decisions made based on this content.
© 2026 NABS AI Solutions Pvt. Ltd. | banklens.nabsai.com