Non-Performing Assets (NPA) Explained: Classification, SARFAESI, IBC and Loan Recovery — Banking Awareness for RBI Grade B & Bank PO
Quick answer: A Non-Performing Asset (NPA) is a loan or advance on which interest or principal has remained overdue for 90 days or more, as per RBI norms. Banks classify assets as Standard, Sub-standard, Doubtful or Loss, and recover bad loans through the SARFAESI Act 2002, Debt Recovery Tribunals (RDDBFI Act 1993) and the Insolvency and Bankruptcy Code 2016. This one-pager covers definitions, formulas, timelines and PYQ-style MCQs for RBI Grade B, Bank PO and UPSC.
- What is a Non-Performing Asset (NPA)? — Direct Answer
- RBI Asset Classification: Standard, Sub-Standard, Doubtful and Loss Assets
- How a Loan Becomes an NPA: The 90-Day Rule and Outstandings
- Types of NPA: Gross NPA vs Net NPA
- Provisioning Norms and Why NPAs Hurt Banks
- Causes of Rising NPAs in India
- NPA Recovery Route 1: SARFAESI Act, 2002
- NPA Recovery Route 2: Debt Recovery Tribunals (RDDBFI Act, 1993)
- NPA Recovery Route 3: Insolvency and Bankruptcy Code, 2016
- Other Measures: Lok Adalats, Compromises, ARC Sales and Asset Reconstruction
- Government and RBI Initiatives to Tackle NPAs
- Exam Corner: Previous-Year Style MCQs and Quick Revision Points
- Frequently Asked Questions
- Q: What is the full form of NPA and its 90-day rule?
- Q: What is the difference between SARFAESI and IBC?
- Q: What are the four classifications of assets by RBI?
- Q: What is a wilful defaulter?
- Q: How is Net NPA calculated?
- Related reading
What is a Non-Performing Asset (NPA)? — Direct Answer
As per the Reserve Bank of India’s master circular on asset classification, an NPA is a credit facility where interest and/or instalment of principal remains overdue for more than 90 days. Once a loan becomes an NPA, it stops generating income for the bank — interest cannot be booked as income and must be reversed. For exam purposes: NPA = 90 days overdue = asset ceases to perform.
RBI Asset Classification: Standard, Sub-Standard, Doubtful and Loss Assets
RBI’s prudential norms classify bank assets into four categories:
- Standard Asset: Performing loan; no risk of default. Normal provisioning of 0.25%–0.40% (farm credit and SME exposures have separate norms).
- Sub-Standard Asset: An NPA for 12 months or less. Inadequate collateral protection; full security net of ECGC/CGTSI cover is not available.
- Doubtful Asset: An NPA that has remained sub-standard for more than 12 months. Further classified as Doubtful-1 (up to 1 year), Doubtful-2 (1–3 years) and Doubtful-3 (over 3 years), with rising provisioning.
- Loss Asset: Identified as a loss by the bank, RBI inspectors or auditors; value is so low that continuance as a bankable asset is not warranted — it should be fully written off.
How a Loan Becomes an NPA: The 90-Day Rule and Outstandings
The trigger is any amount of interest or principal overdue beyond 90 days. If a borrower misses an instalment on 1 January, the account becomes NPA on 31 March (i.e., on the 91st day). Key sub-rules exams test:
- Agricultural loans: Seasonality applies — for short-duration crops, an account is NPA if overdue for two crop seasons; for long-duration crops, one crop season after harvesting.
- An account classified NPA can be upgraded to standard only after entire arrears of interest and principal are cleared, not merely the overdue portion.
- Out of order (cash credit/overdraft): if the outstanding balance is continuously in excess of the sanctioned limit for 90 days.
Types of NPA: Gross NPA vs Net NPA
Gross NPA is the total of all loan accounts classified as non-performing. Net NPA is Gross NPA minus the provisions made against those loans.
- GNPA Ratio = Gross NPA / Gross Advances × 100
- NNPA Ratio = Net NPA / Net Advances × 100
GNPA shows the scale of bad loans; NNPA shows what remains a real charge on the bank’s balance sheet after provisioning. Both ratios are core Banking Awareness and RBI Grade B Phase-I material.
Provisioning Norms and Why NPAs Hurt Banks
Banks must set aside a portion of income as provisions against NPAs, per RBI norms: roughly 15% for sub-standard assets (unsecured exposures higher, up to 25–100%), 25%–40% for doubtful assets depending on age (plus full provisioning of the unsecured portion), and 100% for loss assets. Heavy NPAs hurt banks by eroding profitability, shrinking lending capacity, increasing cost of funds, damaging credit ratings, and — at the system level — crowding out fresh credit to productive sectors. The 2015 AQR (Asset Quality Review) by RBI forced recognition of hidden NPAs, which is why reported GNPA ratios spiked and then fell.
Causes of Rising NPAs in India
- Internal causes: poor credit appraisal, lax post-sanction monitoring, evergreening of loans, project delays, and linked-lending weaknesses.
- External causes: sectoral stress (infrastructure, steel, power, textiles), global commodity price crashes, economic slowdown, and kwilful default — borrowers with capacity to pay who divert or siphon funds.
- The 2011–2016 surge was driven largely by stalled infrastructure projects and promoter risk, as documented in RBI’s AQR and Government of India economic surveys.
NPA Recovery Route 1: SARFAESI Act, 2002
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 allows secured creditors (banks and financial institutions) to recover dues without court intervention. Key features:
- Applies to secured loans where security interest is charged; borrower’s account must be classified NPA.
- Bank issues a 60-day notice under Section 13(2); if the borrower fails to repay, the bank can take possession of collateral, lease or sell it under Section 13(4).
- Borrower can challenge before the Debt Recovery Tribunal (Section 17) within 45 days; banks must file a reply within 15 days.
- The Act also created Asset Reconstruction Companies (ARCs) and enabled securitisation.
- The SARFAESI Amendment, 2016 extended powers to more NBFCs and strengthened enforcement.
NPA Recovery Route 2: Debt Recovery Tribunals (RDDBFI Act, 1993)
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 set up Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for fast-track recovery suits. Banks file recovery applications with DRTs when the loan is unsecured or SARFAESI is not applicable (SARFAESI covers secured interests only). Appeals lie with the DRAT, now the Commercial Court framework in some cases. Exam pointer: DRTs were created because ordinary civil courts were slow — recovery cases dragged on for decades.
NPA Recovery Route 3: Insolvency and Bankruptcy Code, 2016
The IBC is a collective, creditor-driven resolution mechanism, unlike SARFAESI’s individual-enforcement route. Key features:
- Financial or operational creditors file an application; the NCLT (National Company Law Tribunal) admits it if a default is established.
- Admission triggers a moratorium under Section 14 — no individual suits, no SARFAESI action against that borrower.
- CIRP (Corporate Insolvency Resolution Process): maximum 180 days, extendable by 90 days (180 + 90).
- The Committee of Creditors (CoC) — financial creditors with 66% voting share for key decisions — evaluates resolution plans.
- Outcome: a resolution plan (approved by NCLT) or liquidation as the last resort.
Other Measures: Lok Adalats, Compromises, ARC Sales and Asset Reconstruction
Banks also use multi-pronged recovery channels per RBI’s prudential framework: Lok Adalats for small-value accounts, One-Time Settlements (OTS)/compromise settlements, and sale of NPAs to ARCs (created under SARFAESI) which buy bad loans at a discount and reconstruct them. The SARFAESI Amendment 2016 expanded ARC powers and permitted 100% foreign investment in ARCs.
Government and RBI Initiatives to Tackle NPAs
- Project Indradhanush (2015): recapitalisation and governance reforms for PSU banks.
- Asset Quality Review (2015): forced clean recognition of NPAs.
- 4R Strategy: Recognition, Resolution, Recapitalisation and Reform.
- IBC 2016 and SARFAESI Amendment 2016 for time-bound resolution.
- Recapitalisation bonds (2017): ₹2.11 lakh crore PSU bank recap package.
- Project Sashakt (2018): SME sector resolution and asset management company plan.
- Ease of exit: banks permitted to undertake compromise settlements and technical write-offs; NaBFID, National Asset Reconstruction Company Ltd (NARCL/”bad bank”, 2021) for aggregated stressed assets.
- Current trend note: RBI’s Financial Stability Reports show gross NPAs of scheduled commercial banks falling to multi-year lows — around 3% of gross advances and trending toward “nil-two-digit” territory — after peaking near 11% post-AQR.
Exam Corner: Previous-Year Style MCQs and Quick Revision Points
Q1. A loan becomes NPA when interest/principal remains overdue for:
(a) 30 days (b) 60 days (c) 90 days ✓ (d) 180 days
Q2. Under SARFAESI, the notice period given to the borrower before enforcement is:
(a) 30 days (b) 60 days ✓ (c) 90 days (d) 45 days
Q3. CIRP under IBC must be completed within:
(a) 90+90 days (b) 180+90 days ✓ (c) 270+90 days (d) 120 days
Q4. An NPA that has remained sub-standard for over 12 months is a:
(a) Loss asset (b) Standard asset (c) Doubtful asset ✓ (d) Sub-standard asset
Q5. Net NPA equals:
(a) Gross NPA + provisions (b) Gross NPA − provisions ✓ (c) Gross advances − provisions (d) Net advances − GNPA
Revision table:
| Law/Body | Year | Key point |
|---|---|---|
| RDDBFI Act (DRT/DRAT) | 1993 | Recovery suits, incl. unsecured loans |
| SARFAESI Act | 2002 | Seize/sell collateral without court; 60-day notice; ARCs |
| SARFAESI Amendment | 2016 | Wider coverage, stronger ARCs |
| IBC / NCLT / CoC | 2016 | Collective resolution; 180+90 days; moratorium |
| RBI asset classification | — | Standard / Sub-standard (≤12 m) / Doubtful / Loss |
Frequently Asked Questions
Q: What is the full form of NPA and its 90-day rule?
NPA stands for Non-Performing Asset. Under RBI norms, a loan becomes an NPA when interest and/or principal remains overdue for 90 days or more.
Q: What is the difference between SARFAESI and IBC?
SARFAESI lets secured creditors seize and sell collateral without court intervention (60-day notice). IBC is a collective insolvency resolution through NCLT with a fixed 180+90 day timeline and a moratorium that bars parallel recovery actions.
Q: What are the four classifications of assets by RBI?
Standard, Sub-standard, Doubtful and Loss assets.
Q: What is a wilful defaulter?
A borrower with repayment capacity who defaults deliberately or diverts/siphons funds. Wilful defaulters face penal action and are debarred from fresh institutional credit.
Q: How is Net NPA calculated?
Net NPA = Gross NPA − provisions; NNPA ratio = Net NPA / Net Advances × 100.
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Quick revision
- Standard Asset: Performing loan; no risk of default. Normal provisioning of 0.25%–0.40% (farm credit and SME exposures have separate norms).
- Sub-Standard Asset: An NPA for 12 months or less. Inadequate collateral protection; full security net of ECGC/CGTSI cover is not available.
- Doubtful Asset: An NPA that has remained sub-standard for more than 12 months.
- Loss Asset: Identified as a loss by the bank, RBI inspectors or auditors; value is so low that continuance as a bankable asset is not warranted — it should be…
- Agricultural loans: Seasonality applies — for short-duration crops, an account is NPA if overdue for two crop seasons; for long-duration crops, one crop season after…
- An account classified NPA can be upgraded to standard only after entire arrears of interest and principal are cleared, not merely the overdue portion.
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