The IUP Journal of Accounting Research and Audit Practices:
Research Note
Income Recognition, Asset Classification and Provisioning Norms for Retail Loans in India

Article Details
Pub. Date : April, 2022
Product Name : The IUP Journal of Accounting Research and Audit Practices
Product Type : Article
Product Code : IJARAP060422
Author Name :B Amarender Reddy* D Sreenivasa Chary**
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 8



Interest on loans and advances and investments is the principal source of income to banks, whether they are Indian or international. Net interest income-the difference between the interest received and interest paid by a bank-decides its profitability. Hence, the method of accounting of interest is of greater significance. Three decades ago, interest on loans and advances used to be accounted on accrual basis. Periodical interest on loans used to be debited to loan account, and the interest account credited, irrespective of the fact whether repayments of loan installments and interest is regular or not. Because of this practice, the interest income on one side and the amount loans and advances on the other side used to bulge in the financial statements. In such circumstances, it was difficult to say, whether the interest income appearing in the books of accounts is really realized or not. Such a practice is against the basic principles of "realization concept" and "conservative concept" of accountancy. Performing loan accounts as income for banks commenced after the introduction of Income Recognition and Asset Classification (IRAC) Norms in India in 1992.


Banks do business with public money, collected by way of deposits. Sometimes they lend by borrowing from the market also. Banks are required to repay such deposits/market borrowings on demand or on due date, together with interest. They use the money sourced by way of public deposits and market borrowings for lending and investment. It is not uncommon that some such loan accounts become bad and doubtful for recovery and a few are required to be written off. Such write-offs are to be done from the capital and reserves of banks. Now the question is, "How much capital a bank should have?" A probable answer is, a bank shall have as much capital as sufficient to absorb its probable loan losses. A concrete answer was given to this question by the Basel Committee on Banking Supervision (BCBS), in 1988 by introducing the Basel-I norms. According to Basel-1, a bank is required to maintain capital to the extent of 8% on its risk-weighted assets. This is called Capital Adequacy Ratio (CAR). As per RBI guidelines, banks in India are required to maintain a CAR of 9%.