Non-Performing Assets (NPAs) refer to loans in which the borrower fails to pay scheduled principal or interest installments for 90 days or more. Since lenders generate revenue from interest on loans, when a loan account doesn’t receive any payments for three months, it is recognized as an NPA (bad debt) because it stops earning income for the lender. If you have an NPA, it can severely damage your credit score, making it tougher or impossible to secure loans or credit facilities in the future, especially at favorable interest rates.
Financial institutions classify loans that haven’t made the scheduled principal or interest payments for 90 days or more as Non-Performing Assets (NPAs).
The banking and financial sector plays a crucial role in the economic development of a country. However, the sector faces various challenges, one of which is the issue of Non-Performing Assets (NPAs). NPAs in India have become a significant concern for banks and lending institutions, affecting their profitability, liquidity, and overall financial stability. Understanding what are non-performing assets, their types, and their impact on lenders and borrowers is essential for maintaining a healthy financial system.
What is NPA in a loan?
Non-performing assets (NPAs) refer to loans or advances made by banks or financial institutions that have not been repaid or have become overdue for a specified period. In other words, when a borrower fails to make interest or principal payments on a loan for an extended period, the loan is classified as a non-performing asset. These assets are considered non-productive as they do not generate any revenue for the bank or financial institution.
Why NPAs matter: Significance for banks, economy & borrowers
The main reason why NPAs are important is that they affect banks, the economy, and borrowers. Here’s the significance of non-performing assets for these three sectors:
Banks: When loans remain unpaid, banks don’t get the interest income they rely on. This affects their financial health and limits their ability to lend. It can also reduce public trust, causing depositors to pull out their money.
Economy: With less money available for lending, businesses struggle to get credit for expansion and daily operations. This slows down economic growth, reduces investment, and can lead to job losses.
Borrowers: To recover losses from unpaid loans, banks may increase interest rates or tighten loan approval rules. This has a serious NPA impact on individuals that makes borrowing more expensive and reduces access to credit.
How do NPAs work?
Lenders don’t label loans as NPAs right away; they wait for a period of non-payment, typically 90 days. During this time, they assess various factors that may cause payment delays and may grant a grace period. However, if payments remain overdue for 90 days, the loan is classified as an NPA (non-performing asset).
Once a loan is classified as an NPA in India, the lender can begin legal recovery proceedings. The lender may issue recovery notices, restructure the loan, or initiate legal action. If the borrower fails to make repayments, the lender can recover dues by taking possession of and selling pledged collateral under applicable laws. The lender can also opt for insolvency proceedings. It differs from case to case.
What are the types of non-performing assets?
Non-performing assets can be categorized into the following types:
Substandard assets
Substandard assets are those with principal and/or interest repayment overdue for more than 90 days but not exceeding 12 months. These non-performing assets pose a higher risk of default and require special attention from the bank to prevent further deterioration.
Doubtful assets
Doubtful assets are those with arrears exceeding 12 months. There is a significant risk associated with recovering these non-performing assets, and banks often need to make provisions to cover potential losses. These assets require intensive monitoring and may require substantial restructuring to recover.
Loss assets
Loss assets are those where the losses have been identified by the bank, internal or external auditors, or the Reserve Bank of India (RBI), but the amount has not been written off wholly. These non-performing assets are considered irrecoverable, and banks must write off the outstanding amount from their books to accurately reflect their true financial position.
What is NPA provisioning?
Provisioning refers to the amount that financial institutions keep aside from their income or profits during a specific quarter for non-performing assets. It is a financial risk management technique used by financial institutions through which they can account for their NPAs and other assets that may become losses in the future.
The provisioning regulations and norms for financial institutions across the country are determined by the Reserve Bank of India (RBI). These regulations vary based on the type and size of the NPA, as well as the lender’s location.
According to the RBI’s Master Circular – Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances issued on July 1, 2014, the provisioning requirements for the different types of NPAs are as follows:
Sub-standard assets: Banks set aside around 15% of the outstanding loans for sub-standard assets.
Doubtful assets: The provision rates range from 25% to 100% of the secured portion, depending upon the period for which the asset has remained doubtful.
Loss assets: Banks should write off loan assets, providing 100% of the outstanding loan.
NPA provisions affect bank financials. If NPAs are higher, they reduce a bank’s profits because more money must be set aside as provisions. They lower the bank’s available funds for fresh lending and weaken asset quality. They can also affect key financial ratios, investor confidence, and overall profitability.
What are the differences between gross and net non-performing assets?
Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA) are two important measures of a bank’s asset quality. Together, these ratios help investors, regulators, and borrowers assess a bank’s financial health and its ability to manage credit risk.
The table below outlines the differences between the GNPA and the NNPA.
Basis
Gross NPA (GNPA)
Net NPA (NNPA)
Meaning
Total value of loans classified as NPAs before deducting provisions.
Value of NPAs remaining after deducting provisions made by the bank.
GNPA/NNPA Ratio definition
GNPA Ratio measures the percentage of a bank’s total advances that have become non-performing assets. It indicates the overall level of bad loans in the loan portfolio.
NNPA Ratio measures the percentage of net advances that remain non-performing assets after deducting provisions. It reflects the bank’s actual credit risk after accounting for expected losses.
Formula
GNPA Ratio = (Gross NPAs / Gross Advances) × 100
NNPA Ratio = (Net NPAs / Net Advances) × 100 where Net NPAs = Gross NPAs − Provisions
What it indicates
Overall level of bad loans in the loan portfolio.
Actual credit risk after accounting for expected losses.
Provision adjustment
There are no adjustments for provisions.
Adjustments are made based on the provisions set aside by the bank.
A higher ratio indicates
If the ratio is high, it means more loans have become non-performing assets.
A higher ratio means greater residual credit risk and lower asset quality.
Used by
Regulators, analysts, and investors use GNPA to measure gross asset quality
Investors and analysts used NNPA to evaluate the bank’s financial strength after provisioning
Typical value
Higher than NNPA.
Lower than GNPA because provisions reduce the outstanding bad loan amount.
When businesses fail to repay their loans due to factors like economic downturns or mismanagement, their loans become NPAs. For instance, if a manufacturing company defaults on its loan payments due to a decline in demand, the loan becomes an NPA.
A real-life example of a corporate NPA involves Essar Steel. The company defaulted on over Rs. 49,000 crore to a syndicate of lenders led by the State Bank of India (SBI). As a result, the company’s reputation was damaged, and it underwent insolvency proceedings.
Loans extended to farmers can Agricultural loans
turn into NPAs if borrowers fail to repay them, often due to crop failure or natural disasters. This is a significant issue in India, where agriculture is crucial to the economy.
For example, a farmer in Karnal, Haryana, secured a loan worth Rs. 50 lakh at 9.5% interest per annum. However, the farmer defaulted on payments after 3 years due to market volatility, weather stocks, and a lack of post-disaster financial restructuring.
In the case of an agricultural NPA, farmers may lose access to fresh agricultural credit and face financial stress. They may have to deal with recovery action where applicable.
Retail loans
Personal, home, and vehicle loans can also become NPAs if borrowers default. Common reasons include job loss or medical emergencies. For example, if an individual fails to repay their home loan due to unemployment, it becomes an NPA.
If you have an NPA, you may experience a decline in your credit score, making it harder to obtain future loans or credit cards. You may also face penalty charges, recovery proceedings, and repossession of collateral in the case of secured loans.
Banks use several NPA recovery processes to reduce losses and bring defaulted loans back on track. One common step is to talk to the borrower and adjust the loan terms. For example, giving more time to repay or lowering the interest rate. This helps make the loan manageable. If this doesn’t work, banks may hire recovery agents or take legal action as part of their NPA resolution strategies.
They also rely on legal frameworks like the SARFAESI Act, Debt Recovery Tribunal
nals, Lok Adalats, and the Prompt Corrective Action (PCA) system to speed up how banks deal with NPAs. Another method is selling bad loans to Asset Reconstruction Companies (ARCs), which buy NPAs at a lower value and try to recover the money themselves.
How are NPAs calculated?
Banks use various ratios to measure and monitor the level of NPAs. The most commonly used ratio is the Gross NPA ratio, which is calculated as follows:
Gross NPA Ratio = (Total NPAs / Total Loans and Advances) × 100
Gross NPAs refer to the total outstanding principal amount of non-performing assets, while Gross Advances represent the total outstanding loans and advances made by the bank.
Now that we understand what are non-performing assets, the question arises: what are the factors that can lead to an NPA?
Which factors lead to an NPA?
Several factors contribute to the formation of non-performing assets:
During periods of economic downturn, businesses may face financial difficulties, leading to loan defaults.
If borrowers divert funds for purposes other than those specified in the loan agreement, it can lead to loan defaults.
Poor management practices, lack of planning, and inefficient resource utilization can lead to business failures and, consequently, loan defaults.
Natural disasters, like earthquakes, droughts, or floods, can adversely impact borrowers’ ability to repay their loans.
Changes in government policies, such as taxation, interest rates, or regulations, can impact borrowers’ financial performance and their ability to repay loans.
What is the impact of NPAs?
Non-performing assets can have significant consequences across various sectors:
On the Indian economy
High NPAs strain banks’ financial health, limiting their ability to lend and hampering economic growth by reducing credit flow to businesses.
On creditors
NPAs cause banks financial losses and reduced profitability, erode investor confidence, and hinder their capacity to raise capital from the market.
On debtors
Borrowers face higher borrowing costs as banks raise interest rates to offset NPA losses. This limits funding opportunities for viable projects, hampering economic development and job creation.
Non-performing assets (NPAs) are a significant concern for the banking and financial sector in India. They affect the profitability and stability of lending institutions and have far-reaching consequences for borrowers and the overall economy. Addressing the issue of NPAs requires a concerted effort from both lenders and borrowers.
Banks and financial institutions must strengthen their risk management practices, conduct thorough credit assessments, and implement effective recovery mechanisms. Borrowers, on the other hand, should prioritize timely loan repayment to maintain a good credit history and avoid legal consequences.
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When a loan becomes a Non-Performing Asset (NPA), the lender stops receiving interest as income and begins recovery efforts. The lender may restructure the account, take legal action, or sell the pledged collateral to recover the outstanding loan amount.
How do lenders deal with an NPA?
Lenders have many ways to deal with NPAs, like trying to recover the amount, selling the NPA to an asset reconstruction company, or restructuring the NPA.
What happens if my account becomes NPA?
If your account becomes NPA, the financial institution is required to report it to credit information companies. This could negatively impact your credit score.
What is the punishment for NPA?
Formal notices are sent out after 60 days of non-payment. Lenders will increase recollection efforts if it exceeds 90 days, and legal action can be taken. Interests and penalties may also arise.
How do I settle my NPA account?
Borrowers must contact their lenders and express their willingness to settle a debt. They must also provide information about their financial situation and negotiate a settlement amount.
How are NPA classified?
NPAs are classified depending on their repayment status. If loans are overdue for more than 90 days, financial institutions will classify them as NPAs.
What is the full form of NPA?
NPA stands for Non-Performing Asset. It refers to a loan where the borrower has stopped making repayments for a certain period.
What is a Non-Performing Asset (NPA) in banking?
An NPA is a loan that is no longer being repaid on time. If interest or EMI payments remain overdue for 90 days or more, the bank marks the loan as a Non-Performing Asset.
What are the different types of NPAs?
NPAs are usually divided into four types: Sub-Standard Assets, Doubtful Assets, Loss Assets, and Special Mention Accounts (SMA). Each category shows how long the loan has been overdue and how likely it is to be recovered.
How long does a loan have to be overdue to become an NPA?
A loan becomes an NPA when the borrower fails to pay interest or EMIs for 90 days in a row. After this period, the bank considers the loan non-performing.
What is the difference between Gross NPA (GNPA) and Net NPA (NNPA)?
Gross NPA is the total value of all unpaid loans. Net NPA is what remains after subtracting the money banks set aside as provisions. Net NPA shows the actual loss risk to the bank.
How does a high NPA ratio affect banks and the economy in India?
A high NPA ratio weakens banks, reduces their ability to lend, and lowers public trust. This slows business growth, reduces investments, and can negatively impact jobs and overall economic activity.
What steps can a borrower take to avoid their loan becoming an NPA?
Borrowers can pay EMIs on time, avoid taking too many loans, track their credit score, and inform the bank early if they face financial trouble. They can also ask for restructuring to make repayments easier.
What happens to your credit score if your loan becomes an NPA?
If your loan turns into an NPA, your credit score drops quickly. This makes it harder to get new loans or credit cards, and lenders may offer higher interest rates due to increased risk.
When does a loan become a non-performing asset?
A loan becomes a Non-Performing Asset (NPA) when the borrower fails to repay the principal or interest for more than 90 days.
What is the 90-day rule for classifying NPAs?
The 90-day rule states that a loan is classified as a non-performing asset if the borrower fails to pay interest or principal for more than 90 consecutive days. Lenders can use this standard to identify stressed loans. Consequently, they can initiate recovery measures.
14 July 2026
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