Non Performing Assets (NPA)

The assets of the banks which don’t perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.

According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of Agriculture / Farm Loans; the NPA is defined as under:

  • For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
  • For Long Duration Crops, the above would be 1 Crop season from the due date.

Provisioning Coverage Ratio

For every loan given out, the banks to keep aside some extra funds to cover up losses if something goes wrong with those loans. This is called provisioning. Provisioning Coverage Ratio (PCR) refers to the funds to be set aside by the banks as fraction to the loans.

Standard Asset

If the borrower regularly pays his dues regularly and on time; bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.

However, if things go wrong and loans turn into bad loans, the PCR would increase depending up the classification of the NPA as discussed in next section.

Classification of the NPAs

Banks are required to classify nonperforming assets further into three main categories (Sub-standard, doubtful and loss) based on the period for which the asset has remained non performing. This is as per transition of a loan from standard loan to loss asset as follows:

  • If the borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as follows:
    • 15% of outstanding amount in case of Secured loans
    • 25% of outstanding amount in case of Unsecured loans
  • If sub-standard asset remains so for a period of 12 more months; it would be termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows:
    • Up to one year: 25% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
    • 1-3 years: 40% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
    • more than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
  • If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal / external audit and it would be called loss asset. An NPA can declared loss only if it has been identified to be so by internal or external auditors.

Example of NPA

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So

  • It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date)
  • It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days)
  • It will be Sub-standard from August 30, 2010 till August 29, 2011
  • It will be doubtful from August 30, 2011 till August 29, 2012

It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years.

Implications of the NPAs on Banks

The most important implication of the NPA is that a bank can neither credit the income nor debit to loss, unless either recovered or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.

Gross NPA and Net NPA

The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the amount which is outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross NPA less interest debited to borrowal account and not recovered or recognized as income. RBI has prescribed a formula for deciding the Gross NPA and Net NPA.


The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.

Reselling of NPAs

If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).  These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount.

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  • Hemant thakur

    Very valuable information. Thanks a lots

  • shanthi

    still i dont understand rhe exact meaning of NPA. please explain with any other example

    • Anand Kumar

      It means Non performing Asset. which is opposite of performing asset for Bank. Asset is Loan given to customer which earn income for Bank as interest.

    • anjeel

      it’s nothing but declaring a loanee unfit ….hahahahaha….that he is not repaying……so take all his collateral to refund

  • Samir Roy

    If any body deposit the interest & term loan after 2/ 3 day after NPA then what happen

  • Ronak Jain

    Really, very valueable information in very easy language

  • Shailly Gupta

    Thanku for such information in simple way and very easy to understand with the help of examples.

  • tayappa koli

    Thanks to General knowledge today for sharing such valuable information

  • sunil patnaik

    A Notice has been sent to one guaranter after 13 years of a NPA account, where the applicant is absconded since long. What should the guaranteer do?

  • Somnath Mandal

    A1 info. A lot of thanks.

  • Priyanka

    I have read many websites and books for banking terms and explanations. But I was very clear about the concept after reading your website… Very useful and nice explanation has been provided using simple words…. great job thank you for the info..


    Very good succesion

  • R.C. Sharma

    explained in a very simple manner that even a lay man can understand the cocept in one go.

  • Roshan Das

    Thank you very much for sharing of Knowledge.

  • indianguy

    If a bank has written off an amount and give customer an account statement showing closing balance as zero, can bank still try to recover the written off amount?

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  • Pratima srivastava

    Thanks a lot for giving this information
    I was confused
    concept is clear now

  • Putta raje urs N

    Ex army personal loan non credited sine long time nearabout twenty thousand Rs and later bank provide credit one time settlement the amount with interest. Same was deposited.The acct remain NPA.

  • Putta raje urs N

    I would like to known who are eligible and anycealing limit for NPA. Is also apply for farmers lian and ex army persons of personal loan. If loan cleared of submission of solution then NPA is applicable.

  • Putta raje urs N

    Thanks for info. I may closed such acct permanently

  • syed ismail

    As per your article you mentioned NAP Sales to ARC company [india]. I have clarification you mentioned the account keeps at-least 15 months. What happened after 15 months. They can(ARC Company) return to bank or they have maintained(ARC Company).

  • waqaransari

    I am so happy l have known after studying thanks a lot given us eassy information

  • Ankush

    Very valuable information. The article has cleared some doubts which were not clear previously

  • surender bhardwaj

    great explanation but u did’t cover NPA in agriculture

  • Purna Indu Mukhopadhyay

    I had a loan became as NPA, though bank settled with a lower amount. which I had paid and bank gave certificate on that. Is there any bad impact can show on my CIBIL or any future loan or Credit Card application?

  • [email protected]

    The revised norms issued during February 2018 to be implemented in true spirit.


    Very Nice notes sir .thank you verymuch Sir

  • angad mishra

    is interest is applicable on rest amount of NPA account , my account hss converted in NPA in oct 2017

  • Raghavendra

    Great……HOnestly good job…can you please relate it with the FRDI bill, the same content.??

  • Jaikish Jain

    Good information….. I have a query if anybody can resolve please? I have mortgage loan and that is got NPA on 31St of July. Problem is the company i was working as a ASM becomes bankrupt and not giving the salary of all the employee including me and this is the only source of income for me to run the family. In this case is there any way or LAW which can help me to get out of this. and protect myself from NPA and SARFESIA process. Please let me know.