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Non-Performing Assets (NPA): meaning, categories and recovery
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A non-performing asset (NPA) is a loan or advance on which interest or principal remains overdue for more than 90 days. The loan has stopped earning income for the bank, so the bank must classify it, stop booking interest as income and set aside provisions.
Early warning: SMA categories
Before a loan becomes an NPA, banks tag it as a special mention account (SMA) based on how long payment is overdue:
| Stage | Days overdue |
|---|---|
| SMA-0 | 1 to 30 |
| SMA-1 | 31 to 60 |
| SMA-2 | 61 to 90 |
| NPA | More than 90 |
Categories of NPA
- Substandard asset: an NPA for up to 12 months.
- Doubtful asset: has stayed substandard for 12 months or more, so recovery is in doubt.
- Loss asset: the bank or its auditor has identified the loss, but the amount is not fully written off.
Gross vs net NPA
- Gross NPA ratio = gross NPAs ÷ gross advances × 100
- Net NPA ratio = (gross NPAs − provisions) ÷ (gross advances − provisions) × 100
If a bank has gross advances of ₹1,00,000 crore and gross NPAs of ₹5,000 crore, its gross NPA ratio is 5%. If it has set aside provisions of ₹3,000 crore, net NPAs are ₹2,000 crore and the net NPA ratio is 2,000 ÷ 97,000 × 100, about 2.06%. The provision coverage ratio is provisions divided by gross NPAs, here 60%.
How banks recover
Banks use the SARFAESI Act to take over secured assets without going to court, the Insolvency and Bankruptcy Code for corporate cases, debt recovery tribunals, Lok Adalats, sales to asset reconstruction companies and, finally, write-offs. The impact on solvency is measured through the capital adequacy ratio.
How bank exams ask about it
Look for the 90-day rule, the order substandard to doubtful to loss, the formula for gross and net NPA, and which law lets banks seize collateral. Calculation questions give advances, NPAs and provisions. The topic belongs in the banking block of banking awareness.
Where to find the latest NPA data
The RBI's Financial Stability Report and Report on Trend and Progress of Banking in India, both at rbi.org.in, give system-wide figures.
Frequently asked questions
Is an agricultural loan also an NPA after 90 days?
Agricultural loans follow crop-season rules rather than the simple 90-day test. They become NPAs when instalments stay overdue for the number of crop seasons the RBI prescribes.
Does a written-off loan disappear from the borrower's liability?
No. A write-off is only an accounting step; the borrower still owes the money.
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- SARFAESI ActThe SARFAESI Act lets banks take over and sell secured assets of defaulting borrowers without going to court. Process, notice period and exam facts.
- Insolvency and Bankruptcy CodeThe IBC is India's single law to resolve insolvency of companies and individuals on a fixed timeline. NCLT, IBBI, CIRP, CoC and exam facts.
- Capital adequacy ratioThe capital adequacy ratio compares a bank's capital with its risk-weighted assets to show how well it absorbs losses. Formula, tiers, worked example.
- Priority sector lendingPriority sector lending makes banks lend a set share of credit to farming, MSMEs, housing, education and more. Categories, targets and PSLCs.
- CASA ratioCASA ratio is the share of current and savings account deposits in a bank's total deposits. Meaning, formula, example and why a higher CASA lowers funding cost.
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