Loans
Cards
Insurance
Investment
Stock Market
Electronics Mall
CIBIL Score
Knowledge Centre
Calculators
Do not call
En
.webp "Non Performing Assets")
Explore Non-Performing Assets to learn how NPAs indicate loan defaults and affect a bank’s financial health.
Non-Performing Assets (NPAs) are one of the key indicators of a bank’s financial health. They reflect the quality of a bank’s loan book and its ability to recover money from borrowers. High NPAs signal financial stress, impact profitability, and hinder credit growth in the economy. This article explains what NPAs are, how they arise, their types, calculation method, impact, and the regulatory framework governing them.
A Non-Performing Asset (NPA) is a loan or advance for which the borrower has stopped making interest or principal repayments for 90 days or more. When a loan stops generating income for the bank, it is classified as non-performing.
In simpler terms, an NPA is a loan where:
Interest or EMIs remain overdue for more than 90 days
A bank concludes that the borrower is unlikely to repay
The asset no longer contributes to the bank’s revenue
NPAs directly affect a bank’s balance sheet, capital adequacy ratio, and liquidity position.
A loan does not become an NPA overnight. It goes through stages of delinquency. Here’s how the process works:
0–30 days: Standard / regular asset
31–60 days: Special Mention Account (SMA-1)
61–90 days: Special Mention Account (SMA-2)
90+ days: Classified as NPA
Common reasons include loss of income, poor cash flow, industry slowdown, defaults in business, or willful non-payment.
Banks categorise NPAs based on the duration and severity of default:
Substandard Assets: Assets that remain NPA for less than 12 months
Doubtful Assets: Assets that remain NPA for more than 12 months
Loss Assets: Assets identified as uncollectible by banks or auditors; a loss is confirmed
These categories help banks decide provisioning levels and assess the likelihood of recovery.
NPAs come in various forms:
Term Loan NPAs – EMI overdue for 90+ days
Overdraft/Cash Credit NPAs – Account remains out of order for 90+ days
Agricultural Loan NPAs – Overdue for two crop seasons (short-duration crops) or one season (long-duration crops)
Bills Purchased & Discounted – Not paid on the due date
Credit Card Dues – Non-payment beyond 90 days
A few simple examples include:
A business loan where the borrower has not paid EMIs for over 3 months
A home loan where interest dues have accumulated for more than 90 days
A credit card account with no payments for 3 billing cycles
A farm loan overdue beyond the allowed crop season cycle
These represent common NPA scenarios faced by banks.
The key metric used is the NPA Ratio (or Gross NPA Ratio).
The formula is as follows:
Gross NPA Ratio = (Gross NPAs ÷ Gross Advances) × 100
Where:
Gross NPAs = Total value of non-performing loans
Gross Advances = Total loans issued by the bank
If a bank has:
Gross Advances = ₹1,000 crore
Gross NPAs = ₹80 crore
Gross NPA Ratio = (80 ÷ 1,000) × 100 = 8%
A lower NPA ratio indicates improved asset quality.
NPAs have far-reaching consequences, including:
Reduced profitability because banks stop earning interest
Higher provisioning requirements, reducing available capital
Lower credit creation, affecting economic growth
Higher lending rates due to increased risk
Reduced investor confidence in the banking sector
In severe cases, high NPAs can lead to bank failures or mergers.
Banks and regulators take several steps to reduce NPAs:
Stricter credit appraisal and monitoring
One-Time Settlement (OTS)
Restructuring stressed loans
SARFAESI Act recovery proceedings
Debt Recovery Tribunals (DRTs)
Sale of NPAs to ARCs (Asset Reconstruction Companies)
Insolvency and Bankruptcy Code (IBC) for large corporate defaulters
India has battled high NPAs, especially post-2015 due to corporate stress in steel, infrastructure, power, and telecom sectors. Recent years have seen improvement due to:
Efficient recognition standards
IBC recoveries
Strengthened banking governance
Reduction in fresh slippages
Public sector banks have shown notable improvement, though challenges remain.
The classification and treatment of NPAs in India follow RBI’s Prudential Norms, which include:
90-day overdue rule
Classification into substandard, doubtful, loss
Provisioning requirements for each category
Stringent income recognition rules
Guidelines for restructuring, write-offs, and recovery
RBI regularly updates norms to ensure transparency in reporting.
Non-Performing Assets offer a clear view of the banking sector’s credit quality and overall resilience. They highlight how well banks manage risks, recover dues, and maintain discipline in lending. Although high NPAs can strain profitability and confidence, effective regulation, early detection, and strong recovery practices help protect asset quality and ensure long-term financial stability.
Key Points to know:
Reflect the credit health and risk exposure of banks
Affect profitability, liquidity, and overall financial stability
Require strong monitoring, early detection, and disciplined lending
Recovery mechanisms such as SARFAESI, IBC, and OTS support resolution
Lower NPAs strengthen trust, credit flow, and economic growth
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
A non-performing asset refers to a loan or advance on which the borrower has not paid interest or principal for a period of 90 days or more, indicating that the account has stopped generating expected income for the lender.
Types of non-performing assets include term loan NPAs, overdraft and cash credit NPAs, agricultural NPAs, credit card NPAs, and other loan categories that fail to meet repayment obligations within stipulated timelines.
The NPA ratio is calculated by dividing the total gross non-performing assets by the total gross advances and multiplying the result by 100, giving a percentage that reflects the overall stress in a lender’s loan portfolio.
The main causes of NPAs include inadequate credit assessment, economic slowdowns, operational challenges within borrowing entities, intentional non-repayment by borrowers, and unexpected events that disrupt business activity.
Non-performing assets are classified into substandard assets, doubtful assets, and loss assets, with each category reflecting the level of deterioration in the borrower’s repayment capability.
Measures to reduce NPAs include loan restructuring, negotiated settlements, the use of recovery frameworks, proceedings under the Insolvency and Bankruptcy Code, and improved credit monitoring to detect stress early.
The NPA situation in India has shown improvement in recent years, with lenders reporting reduced stress levels due to stronger recovery mechanisms and efficient supervision of borrower accounts.
The difference between an NPA and a bad loan lies in recoverability, as an NPA refers to an account overdue for 90 days or more, while a bad loan refers to an NPA that shows minimal or no likelihood of being recovered.
.jpeg)
88550
Unlock the world of credit! From picking the perfect card to savvy loan management, navigate wisely.
46393
Money Management and Financial Planning covers personal finance basics, setting goals, budgeting...
23143
Explore the investment cosmos! From beginner's guides to sharp-witted strategies, explore India's treasure trove of options.
34974
Navigate the tax maze with ease! Uncover Income Tax 101, demystify jargon with Terms for Beginners, and choose between Old or New Regimes.
13146
Discover essential insights on various types of insurance in India.
4442
Welcome to Tech in Finance, where we explore the exciting intersection of technology and finance...
Personal Loan, Business Loan, Collateral
Credit Score, Report & Analysis
Fixed Deposit, Mutual Fund, NPS, Demat A/C, SGB
General Insurance, Life Insurance, Term Insurance
Stocks, IPOs
Smart Phone, Speaker, EarPhone
Academy 
.jpeg "image not found")
