Non-Performing Asset (NPA)
An NPA refers to a loan on a bank's books where the borrower has not made required payments of principal or interest for over 90 days. RBI defines NPAs and prescribes classification norms for all scheduled commercial banks.
Classification Timeline
| Overdue Period | Classification |
|---|---|
| 0–30 days | Standard Asset |
| 31–90 days | Special Mention Account (SMA) |
| 90+ days | Non-Performing Asset |
Once classified as NPA, loans are further categorised: Sub-Standard (NPA for ≤12 months), Doubtful (NPA for >12 months, split into D1/D2/D3), and Loss Asset (identified as uncollectible).
Provisioning
Banks must set aside provisions when loans are classified as NPA: Sub-Standard Secured 15%, Unsecured 25%, Doubtful D1 25%, D2 40%, D3 100%, Loss Asset 100%. These provisions reduce reported profits.
Gross NPA vs. Net NPA
- •Gross NPA Ratio = Total NPA / Gross Advances x 100
- •Net NPA Ratio = (Gross NPA − Provisions) / Net Advances x 100
Net NPA is considered more accurate as it accounts for provisions already held.
Resolution Mechanisms
Indian banks use several frameworks: IBC (Insolvency and Bankruptcy Code) via NCLT, SARFAESI Act (seize and sell secured assets), One-Time Settlement (OTS), and Asset Reconstruction Companies (ARCs). RBI's PCA framework can restrict a bank's operations if NPA ratios exceed defined thresholds.