What is a Non-Performing Asset (NPA)?
As per RBI's Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRAC Norms), a Non-Performing Asset (NPA) is a loan or advance where:
- Interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan
- The account remains 'out of order' for more than 90 days in respect of an Overdraft/Cash Credit (OD/CC)
- The bill remains overdue for more than 90 days in case of bills purchased and discounted
- Interest and/or installment of principal remains overdue for two crop seasons for short duration crops
- Interest and/or installment of principal remains overdue for one crop season for long duration crops
- The amount of liquidity facility remains outstanding for more than 90 days in respect of a securitisation transaction
Key Definition: "Out of Order" for CC/OD Accounts
An account is treated as 'out of order' if:
- The outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days, OR
- There are no credits continuously for 90 days as on the date of balance sheet, OR
- Credits are not enough to cover the interest debited during the same period
RBI Clarification (2021): For CC/OD accounts, the 90-day period for out of order status should be reckoned based on the outstanding balance in the account being continuously in excess of the sanctioned limit or drawing power.
The 90-Day NPA Rule: Critical Understanding
The 90-day norm is the cornerstone of NPA classification in India. Precise understanding of its application is crucial for both challenging and defending NPA classification:
Calculating the 90-Day Period
| Aspect | Rule |
|---|---|
| Start Date | Day following the due date (not the due date itself) |
| Day Count | Calendar days, not working/business days |
| Term Loans | From the EMI due date that was first missed |
| CC/OD | From the date account went 'out of order' |
| Interest Application | Interest application date ≠ due date; repayment obligation date matters |
| Partial Payment | Does not reset clock unless entire overdue is cleared |
Common Bank Errors in 90-Day Calculation
- Counting from interest debit date instead of EMI due date
- Including the due date in 90-day count (should start from next day)
- Not crediting payments received on time due to system delays
- Wrong treatment of moratorium periods
- Applying product-wrong norms (e.g., treating CC like term loan)
Special Mention Accounts (SMA) - Early Warning System
RBI's Prudential Framework for Resolution of Stressed Assets (June 7, 2019) mandates identification of incipient stress through Special Mention Account (SMA) classifications:
| SMA Category | Basis for Classification | Overdue Period | Bank Action Required |
|---|---|---|---|
| SMA-0 | Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress | 1-30 days | Internal flag; monitoring |
| SMA-1 | Principal or interest payment overdue between 31-60 days | 31-60 days | Report to CRILC; engage borrower |
| SMA-2 | Principal or interest payment overdue between 61-90 days | 61-90 days | Report to CRILC; consider resolution |
| NPA | Principal or interest payment overdue beyond 90 days | >90 days | Classify as NPA; provisions; recovery action |
CRILC Reporting
The Central Repository of Information on Large Credits (CRILC) requires banks to report:
- All borrowers with aggregate exposure of ₹5 Crore and above
- SMA-1 and SMA-2 status on weekly basis (every Friday)
- Current, SMA-0 status on monthly basis
- Special reporting for accounts showing stress
Asset Classification Categories
Once classified as NPA, assets are further categorized based on the period of default and recoverability:
1. Sub-Standard Assets
Definition
An asset which has remained NPA for a period less than or equal to 12 months.
Provisioning Requirement
- Secured portion: 15% of outstanding
- Unsecured portion: 25% of outstanding
- Unsecured exposure of infrastructure loans: 20%
2. Doubtful Assets
Definition
An asset which has remained in the sub-standard category for a period of 12 months.
Provisioning Requirement
| Period | Secured Portion | Unsecured Portion |
|---|---|---|
| Doubtful up to 1 year (D1) | 25% | 100% |
| Doubtful 1 to 3 years (D2) | 40% | 100% |
| Doubtful more than 3 years (D3) | 100% | 100% |
3. Loss Assets
Definition
An asset where loss has been identified by the bank or internal/external auditors or RBI inspection, but the amount has not been written off wholly.
Characteristics
- Considered uncollectable
- Of such little value that continuance as bankable asset is not warranted
- May have some salvage or recovery value
Provisioning Requirement: 100%
Asset Classification Timelines
| Day 0 | Day 31 | Day 61 | Day 91 | Day 456 (12+3 months) | Day 821 (12+12 months) |
|---|---|---|---|---|---|
| EMI Due Date | SMA-1 | SMA-2 | NPA (Sub-standard) | Doubtful-1 | Doubtful-2 |
Upgradation of NPA to Standard
An NPA account can be upgraded to 'Standard' category if:
- Full Payment: Entire arrears of interest and principal are paid by the borrower
- Date of Upgradation: The date on which entire arrears are cleared
- Not Anticipatory: Cannot upgrade based on expected future payments
For Restructured Accounts
Accounts restructured under RBI's Prudential Framework can be upgraded to Standard:
- After satisfactory performance during the specified "monitoring period"
- Monitoring period: Longer of 1 year from commencement of first payment of interest/principal or 2 years from date of implementation
- No payment default during the monitoring period
Income Recognition Norms
When to Stop Recognizing Interest
Once an account is classified as NPA:
- Stop accruing interest on accrual basis
- Interest on NPAs can only be recognized on cash basis
- Previously recognized but unrealized interest must be reversed
- Interest already debited but not recovered becomes part of principal for provisioning
RBI Master Directions - Key References
Essential RBI Circulars for NPA Matters
- Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning (Updated annually)
- Prudential Framework for Resolution of Stressed Assets (June 7, 2019) - DOR.No.BP.BC.34/21.04.048/2018-19
- Master Direction on Classification, Valuation and Operation of Investment Portfolio (2021)
- Framework for Revival and Rehabilitation of MSMEs
- Circular on Compromise Settlements and Technical Write-offs (June 8, 2023)
- RBI COVID-19 Regulatory Package (Various 2020-2021)
Challenging NPA Classification
Borrowers can challenge improper NPA classification on several grounds:
1. Calculation Errors
- Incorrect 90-day computation
- Wrong treatment of payments received
- System errors in crediting accounts
- Interest rate overcharging
2. Procedural Violations
- Non-application of moratorium (COVID or otherwise)
- Failure to restructure eligible accounts
- Non-compliance with Fair Practices Code
- Arbitrary classification without notice
3. Documentation Issues
- Disbursal issues affecting EMI calculation
- Loan agreement ambiguities
- Wrong repayment schedule application
- Force majeure circumstances
Remedies for Wrong Classification
- Internal Grievance: Complaint to bank's grievance redressal officer
- Banking Ombudsman: RBI's Banking Ombudsman Scheme
- Section 17 DRT: If SARFAESI measures initiated based on wrong NPA date
- Civil Suit: For declaration and damages (though DRT preferred)
- Consumer Forum: For deficiency in banking service
Documentation Required for Challenging Classification
- ✓ Complete account statements from sanction to date
- ✓ Loan agreement and sanction letter
- ✓ All correspondence with the bank
- ✓ Payment receipts and proof of remittances
- ✓ Interest rate revision communications
- ✓ Stock statements (for CC/OD accounts)
- ✓ Any moratorium communications
- ✓ Restructuring proposals and responses
Special Categories
Agricultural Loans
- Short Duration Crops: NPA after 2 crop seasons from due date
- Long Duration Crops: NPA after 1 crop season from due date
- Crop season determined by State Level Bankers' Committee
Project Loans
- Date of Commencement of Commercial Operations (DCCO) critical
- Delays in DCCO may be considered for classification
- Specific norms for infrastructure and project finance
MSME Accounts
- Framework for Revival and Rehabilitation of MSMEs applies
- Before Corrective Action Plan (CAP), classification may be held
- Restructuring norms more flexible for viable MSMEs
Practical Tips
For Borrowers
- Monitor your account status regularly through bank statements
- Keep payment proofs - transaction receipts, NEFT/RTGS confirmations
- Communicate in writing for any issues affecting payments
- Request SMA status if you sense difficulty in repayment
- Apply for restructuring early before NPA classification
- Check CIBIL report regularly for classification status
Warning Signs of Impending NPA
- Receiving SMA classification notices
- Bank calling for stock statements more frequently
- Drawing power reducing significantly
- Bank asking for additional security
- Receiving "notice of intention" letters