The concept of Non-Performing Assets (NPAs) lies at the heart of credit risk management in the banking sector. NPAs not only affect profitability but also the liquidity and reputation of financial institutions. Therefore, every bank must adhere strictly to RBI’s Income Recognition, Asset Classification, and Provisioning (IRAC) norms.
This article provides an exhaustive explanation of the meaning, classification, provisioning requirements, recovery mechanisms, restructuring norms, and regulatory guidelines governing NPAs. Each section is designed to give a deep understanding of how banks identify, monitor, and manage NPAs efficiently.
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What is an NPA?
A Non-Performing Asset (NPA) is a loan or advance where the principal or interest payment remains overdue for a specified period. As per RBI guidelines:
- Term Loan → If interest and/or principal remains overdue for more than 90 days.
- Overdraft/Cash Credit → If the account remains “out of order” for more than 90 days.
- Bills Purchased and Discounted → If the bill remains overdue for more than 90 days.
- Agricultural Advances → Depending on the crop season (two crop seasons for short duration crops and one for long duration).
Classification of Assets under IRAC Norms
Banks classify assets into four categories based on the record of recovery and asset quality.
| Category | Definition | Examples |
|---|---|---|
| Standard Asset | Assets which do not disclose any problems and have regular payments. | Regular loan accounts with no overdue installments. |
| Sub-Standard Asset | Assets that have remained NPA for a period less than or equal to 12 months. | Loan overdue for 6 months, still not recovered. |
| Doubtful Asset | Assets that have remained in the sub-standard category for more than 12 months. | Loan overdue for 15 months, pending recovery. |
| Loss Asset | Assets identified as uncollectible by auditors/RBI inspectors but not yet written off. | Fraud cases or insolvency of the borrower. |
Provisioning Requirements
Banks must maintain specific provisions on the outstanding balance of NPAs to cover potential losses. These provisions differ based on asset classification.
| Type of Asset | Provisioning Requirement |
|---|---|
| Standard Asset | 0.25% to 1% depending on sector (e.g., 1% for CRE, 0.75% for Commercial Real Estate – Residential Housing, 0.4% for personal loans). |
| Sub-Standard Asset | 15% on total outstanding (secured portion); 25% if unsecured exposure. |
| Doubtful Asset – up to 1 year | 25% on secured portion + 100% on unsecured portion. |
| Doubtful Asset – 1 to 3 years | 40% on secured portion + 100% on unsecured portion. |
| Doubtful Asset – more than 3 years | 100% on both secured and unsecured portions. |
| Loss Asset | 100% provisioning or write-off. |
Out of Order Criteria (For CC/OD Accounts)
An account is considered “out of order” if:
- The outstanding balance remains continuously in excess of the sanctioned limit/drawing power.
- No credits are received continuously for 90 days.
- Credits are not sufficient to cover interest debited during the same period.
Agricultural NPA Norms
For agricultural advances, classification depends on the harvest cycle rather than fixed 90 days:
- Short duration crops – NPA if overdue for two crop seasons.
- Long duration crops – NPA if overdue for one crop season.
Restructuring and Upgradation Norms
When banks modify terms such as the interest rate or repayment schedule, it is called Restructuring. A restructured account can be upgraded to a standard asset only if:
- The borrower has demonstrated satisfactory performance during the “specified period” (minimum one year of timely payments).
- All arrears have been cleared and restructured terms are followed.
Impact of NPAs
- Reduced profitability due to provisioning requirements.
- Lower capital adequacy ratios.
- Negative investor confidence and credit rating impact.
- Reduced liquidity and lending ability.
Recovery and Legal Framework
Banks use several mechanisms for NPA recovery:
- SARFAESI Act, 2002 – Enables secured creditors to seize and sell assets without court intervention.
- Debt Recovery Tribunal (DRT) – For recovery above ₹20 lakh.
- Lok Adalats – Settlement through conciliation for small loans.
- Insolvency and Bankruptcy Code (IBC) – For corporate borrowers via NCLT process.
Summary Table
| Asset Type | Period | Provision | Recovery Mechanism |
|---|---|---|---|
| Standard | Regular | 0.25–1% | Not applicable |
| Sub-Standard | Up to 12 months | 15–25% | Follow-up, reminder, restructuring |
| Doubtful | 1–3 years | 25–100% | SARFAESI, DRT, IBC |
| Loss | Irrecoverable | 100% | Write-off or sale to ARC |
Conclusion
Effective NPA management is a cornerstone of sound banking. Regular monitoring, timely restructuring, and adherence to RBI norms can minimize default risk.
For banking professionals, understanding the nuances of asset classification and provisioning is essential not just for regulatory compliance but for sustainable financial performance.
