Non-Performing Asset (NPA)
Non-Performing Asset (NPA): A Non-Performing Asset is a loan on which principal or interest has remained overdue for more than 90 days. At that point the lender must stop recognising interest income on an accrual basis, increase provisioning, and report the exposure as impaired.
Why Non-Performing Asset (NPA) matters in credit and collections
- Directly impacts the profitability and capital adequacy ratio of the lending institution.
- Once tagged NPA, the borrower's credit score drops drastically (typically 50-100 points).
- Lenders must allocate capital provisions against NPAs, which blocks liquid capital for new lending.
How an account becomes — and stops being — an NPA
The 90-day rule is the general test for term loans. For a cash credit or overdraft facility the test is different: the account is treated as out of order if the outstanding balance stays continuously above the sanctioned limit or drawing power, or if there are no credits sufficient to cover the interest debited during the period. Agricultural advances follow crop-season-based norms rather than the 90-day rule.
NPAs are then sub-classified by how long they have been impaired. A substandard asset has been an NPA for up to 12 months; a doubtful asset for more than 12 months; and a loss asset is one identified as uncollectible where continuing to carry it as a bankable asset is not justified. Provisioning rises at each step, which is why ageing inside the NPA book matters as much as the headline number.
Upgrading is deliberately hard. An NPA can only return to standard classification when the entire arrears of interest and principal are paid — not on partial regularisation. This is the single most misunderstood mechanic in Indian collections, and it is why a partial recovery on a 120-day account does not repair the asset-quality number.
Regulatory basis
NPA recognition is governed by RBI's Income Recognition, Asset Classification and Provisioning (IRAC) norms. RBI's November 2021 clarification requires day-end classification and confirmed the full-arrears condition for upgrading an NPA back to standard.
Source: Reserve Bank of IndiaHow lenders manage the NPA book
- Segment by recoverability, not by size. A well-secured 200-day account and an unsecured 200-day account need completely different treatment.
- Match the legal remedy to the exposure: SARFAESI for secured assets, Section 138 where cheques bounced, arbitration where the agreement provides for it, DRT above the statutory threshold.
- Run settlement and restructuring analysis explicitly against expected legal recovery net of time and cost — a settlement is often the higher net-present-value outcome.
- Watch the ageing within the NPA book, because provisioning steps up as accounts move from substandard to doubtful to loss.
- Fix the origination signal that produced the NPA. Recovery is remediation; underwriting is prevention.
Non-Performing Asset (NPA) — frequently asked questions
What is the difference between an NPA and a written-off loan?
An NPA is still carried on the balance sheet as an impaired asset. A written-off loan has been removed from the balance sheet after full provisioning. The borrower's legal liability survives a write-off, so recovery efforts can and usually do continue.
Can an NPA be upgraded after a partial payment?
No. Under RBI norms an NPA is upgraded to standard only when the entire overdue interest and principal are cleared. Partial payment reduces the outstanding but does not restore the classification.