90-Day Norm for NPA Classification

The 90-day norm for Non-Performing Asset (NPA) classification is a cornerstone of prudential regulation in the Indian banking and financial system. It defines the threshold beyond which a loan or advance is treated as non-performing due to non-payment of interest or principal. Introduced as part of broader financial sector reforms, the norm aligns Indian banking practices with international standards and plays a critical role in ensuring transparency, stability, and discipline in the Indian economy.
In the context of banking, finance, and the Indian economy, the 90-day norm directly affects asset quality, bank profitability, credit availability, and macroeconomic stability. Its implications extend beyond balance sheets to influence fiscal policy, investor confidence, and economic growth.

Concept of Non-Performing Assets (NPAs)

A Non-Performing Asset refers to a loan or advance for which the borrower has stopped making scheduled repayments of principal or interest. Under the 90-day norm, an asset is classified as an NPA if:

• Interest or instalment of principal remains overdue for more than 90 days in the case of term loans
• An overdraft or cash credit account remains “out of order” for more than 90 days
• Bills purchased or discounted remain overdue for more than 90 days
• Interest or principal remains overdue for two harvest seasons (but not exceeding two half-years) in the case of agricultural advances

This classification applies uniformly across public sector banks, private banks, foreign banks operating in India, and other regulated financial institutions.

Evolution of the 90-Day Norm in India

Prior to banking sector reforms, Indian banks followed a highly lenient approach to income recognition and asset classification. Assets were treated as non-performing only after prolonged periods of default, sometimes extending beyond one year. This resulted in understated NPAs and overstatement of profits.
The introduction of the 90-day norm was gradual:

• Initially, the norm was 180 days during the late 1990s
• In 2004, India adopted the 90-day norm in line with international best practices and Basel standards

This shift marked a significant milestone in strengthening prudential regulation and improving the credibility of Indian banks.

Regulatory Framework and Institutional Oversight

The Reserve Bank of India (RBI) is the primary authority governing NPA classification norms. Through its Master Circulars and Prudential Norms on Income Recognition, Asset Classification, and Provisioning (IRACP), the RBI prescribes:

• Uniform asset classification standards
• Mandatory provisioning requirements
• Guidelines for restructuring, recovery, and resolution

The 90-day norm ensures consistency and comparability across banks, enabling regulators and stakeholders to assess asset quality accurately.

Significance in Banking and Financial Management

The 90-day NPA norm is central to sound banking practices for several reasons:

• It enforces early recognition of stress in loan accounts
• It prevents banks from artificially inflating income by recognising unrealised interest
• It compels banks to improve credit appraisal, monitoring, and risk management systems

By imposing stricter timelines, the norm discourages evergreening of loans and promotes financial discipline among borrowers and lenders alike.

Impact on Bank Profitability and Capital Adequacy

Once an asset is classified as an NPA:

• Banks must stop recognising interest income on an accrual basis
• They are required to make provisions from profits to cover potential losses

Higher NPAs therefore reduce net profits and erode capital adequacy ratios. This can limit banks’ capacity to lend, particularly during periods of economic stress. Public sector banks in India have often required government capital infusion due to elevated NPAs triggered by the 90-day classification norm.

Implications for Credit Growth and the Indian Economy

The 90-day norm has a direct bearing on credit flow and economic activity:

• Positive effects include improved credit quality, better risk pricing, and long-term financial stability
• Short-term constraints may arise as banks become cautious in lending, especially to stressed sectors

During economic downturns, such as after global financial shocks or domestic slowdowns, strict NPA recognition can amplify stress in the banking system. However, from a macroeconomic perspective, transparent recognition of bad assets is essential for sustainable recovery.

Sectoral and Borrower-Level Implications

The norm affects different sectors in varied ways:

• Infrastructure and power projects, with long gestation periods, are more vulnerable to NPA classification
• Micro, Small and Medium Enterprises (MSMEs) may face liquidity stress due to temporary cash flow mismatches
• Agricultural borrowers are given limited seasonal relaxations, though still within prudential boundaries

To mitigate undue hardship, the RBI occasionally introduces restructuring schemes, moratoriums, or temporary regulatory forbearance, while retaining the 90-day norm as the baseline.

Relationship with Insolvency and Recovery Mechanisms

The 90-day NPA classification often acts as a trigger for recovery and resolution processes, including:

• Initiation of proceedings under the Insolvency and Bankruptcy Code (IBC), 2016
• Reference to Asset Reconstruction Companies (ARCs)
• Enforcement under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002

Early identification of NPAs improves the effectiveness of these mechanisms by preventing further deterioration of asset value.

International Comparison and Global Alignment

Globally, the 90-day overdue norm is widely accepted as the standard threshold for identifying non-performing loans. Its adoption places India in alignment with:

• Basel Committee on Banking Supervision guidelines
• International Monetary Fund and World Bank assessment frameworks

This alignment enhances India’s credibility in global financial markets and facilitates cross-border investment and banking cooperation.

Criticism and Challenges

Despite its advantages, the 90-day norm faces certain criticisms:

• It may be considered too rigid during systemic crises or economic disruptions
• Temporary liquidity problems may be mistaken for structural insolvency
• Frequent downgrades can increase volatility in bank balance sheets