What are Non-Performing Assets (NPA)? Meaning, Types & RBI Guidelines

A Non-Performing Asset (NPA) is a loan or advance where the borrower stops paying interest or principal for 90 days or more. NPAs reduce bank profitability and increase financial risk.

Suppose a borrower takes a loan of ₹10,00,000 with a monthly EMI of ₹20,000. If they fail to pay EMIs for 3 consecutive months, the loan becomes an NPA for the bank.
 

This table shows how missed repayments turn a regular loan into an NPA, affecting both the borrower and the bank.

NPAs are a major concern in banking because they lock up money that could otherwise be lent productively. The RBI sets strict guidelines for classifying, reporting, and managing NPAs to ensure transparency and stability in the financial system.

Why are Non-Performing Assets?

Banks treat loans as performing assets when they earn regular income (through EMI and interest payments). The moment this income stops, the loan becomes non-performing. For a bank, every rupee lent is like an investment—if it stops generating returns, it becomes a burden.

Key Characteristics of Non-Performing Assets

Let’s see each of the characteristics briefly with the help of the table given below.
 

Types of Non-Performing Assets (NPA)

When banks and financial institutions lend money, not every loan gets repaid smoothly. Some borrowers delay payments, while others default completely. To classify and monitor such risks, the Reserve Bank of India (RBI) divides NPAs into specific categories. Each type reflects the severity of default and how likely the bank is to recover its money.

1. Substandard Assets
 

• These are loans or advances that remain overdue for more than 90 days but less than 12 months.
   
• Substandard assets are considered risky, but there’s still a possibility of recovery if corrective action is taken.
  
  Example:
  
  Suppose a small textile business takes a loan of ₹10 lakh but fails to pay EMIs for 5 months. Since the account has remained overdue for more than 90 days but less than 12 months, the loan becomes a substandard asset.

2. Doubtful Assets
 

• Loans that remain substandard for 12 months or more are classified as doubtful assets.
   
• The chances of full recovery are low, and banks must set aside a higher provision (reserve for potential loss).
   

Example:

A borrower’s ₹15 lakh home loan hasn’t been repaid for over 14 months despite reminders. The account now moves from substandard to doubtful.

3. Loss Assets
 

• These are loans where the bank or auditor has identified them as uncollectible.
   
• While the loan might still exist on paper, banks must make a 100% provision, treating it as a complete loss.
   

Example:

If a borrower’s company shuts down permanently, leaving no assets to liquidate, the outstanding ₹5 crore loan is declared a loss asset.

4. Standard Assets (for contrast)
 

• Technically not an NPA, but worth noting: these are loans where borrowers are paying regularly.
   
• However, some standard assets may carry high risk due to poor financial conditions of the borrower or unstable industries.
   

RBI Guidelines on Non-Performing Assets (NPA)

The Reserve Bank of India (RBI), as the country’s central bank, has issued clear rules for classifying and managing NPAs. These guidelines ensure transparency in reporting, proper risk management, and fairness to both lenders and borrowers. Let’s break them down in detail.

1. Asset Classification as per RBI

The RBI requires banks to classify their loan assets into four categories for better risk management.
 

• Standard Assets – Performing loans with no overdue payments or defaults.
   
• Substandard Assets – Accounts that remain NPA for up to 12 months.
   
• Doubtful Assets – Accounts that remain NPA for more than 12 months, with weak recovery chances.
   
• Loss Assets – Loans identified by banks, auditors, or RBI as non-recoverable.
   

This structured classification ensures banks can measure the level of stress in loans and make provisions accordingly, preventing sudden shocks to the financial system.

2. NPA Identification Rules

As per RBI’s guidelines, loans are classified as NPAs when overdue beyond specific limits:
 

• Term Loans – Interest or principal overdue for more than 90 days.
   
• Cash Credit/Overdraft Accounts – If marked as “out of order” for over 90 days.
   
• Bills Purchased/Discounted – If unpaid for more than 90 days.
   
• Agricultural Loans – For short-duration crops, overdue for two crop seasons; for long-duration crops, overdue for one crop season.
   

Example: If a borrower misses three consecutive EMIs, the loan is automatically treated as an NPA, regardless of future repayments.

3. Income Recognition Norms

For NPAs, banks are not allowed to recognize accrued interest as income until it is actually received in cash.
This prevents banks from showing inflated profits and ensures financial statements reflect the true earning potential of assets.

4. Provisioning Norms (Expected Loss Buffer)
 

To safeguard against loan losses, RBI mandates that banks must keep aside a portion of profits as provisions:

• Substandard Assets – 15% of the outstanding loan amount.
   
• Doubtful Assets (up to 1 year) – 25% provision.
   
• Doubtful Assets (1–3 years) – 40% provision.
   
• Doubtful Assets (more than 3 years) – 100% provision.
   
• Loss Assets – 100% provision (considered unrecoverable).
   

This provisioning mechanism ensures that banks build a financial buffer to absorb expected losses and protect depositors’ money.
 

5. RBI’s Prudential Framework for Resolution of Stressed Assets (2019)

To improve recovery speed, RBI issued a resolution framework in June 2019:
 

• Banks must review stressed accounts within 30 days of default.
   
• A resolution plan (such as restructuring, loan sale, or legal action) must be finalized within 180 days.
   
• At least 75% of lenders by value and 60% by number must agree to the plan.
   

This framework avoids endless delays and ensures time-bound resolution of bad loans.
 

6. One-Time Settlement (OTS) & Recovery Mechanisms
 

RBI also allows banks to resolve NPAs through settlement or legal tools:
 

• SARFAESI Act, 2002 – Enables banks to seize and sell secured assets without court intervention.
   
• Debt Recovery Tribunals (DRTs) – Special tribunals for loan recovery cases.
  
   

Conclusion

Non-Performing Assets (NPAs) are more than just a banking term; they directly influence a country’s economy, credit growth, and investor confidence. When loans go unpaid, they not only strain a bank’s balance sheet but also reduce the availability of fresh credit for businesses and individuals. Over the years, NPAs have become one of the most pressing issues for the Indian financial system, compelling the Reserve Bank of India (RBI) to step in with stringent guidelines and innovative recovery frameworks.

Frequently Asked Questions

1. What is the minimum time for a loan to be classified as NPA?
A loan becomes an NPA if interest or principal remains overdue for more than 90 days in term loans. For overdrafts/cash credit, it is when the account remains out of order for 90 days.

2. Do NPAs affect the borrower’s credit score?
Yes. When a loan is tagged as NPA, it is reported to credit bureaus. This significantly lowers the borrower’s CIBIL score, making it difficult to secure fresh loans or credit in the future.

3. Can NPAs be restructured by banks?
Yes. RBI allows restructuring or rescheduling of stressed loans under schemes like One Time Settlement (OTS) or Resolution Framework. However, restructured NPAs remain under strict monitoring to avoid misuse.

4. Are agricultural loans treated differently under NPA rules?
Yes. RBI has special rules for crop loans. A short-duration crop loan becomes NPA if overdue for two crop seasons, while a long-duration crop loan is NPA if overdue for one crop season.

5. How do banks recover NPAs?
Banks use multiple recovery mechanisms like the SARFAESI Act 2002, Debt Recovery Tribunals (DRTs), insolvency proceedings under IBC, and asset reconstruction companies (ARCs). Recovery through these channels ensures minimisation of bad loan losses.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.