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A Non-Performing Asset (NPA) is a loan or advance that stops generating the expected income for a lender because the borrower has not made the required repayment for the prescribed period. In the case of a term loan, an account is generally classified as an NPA when the interest and/or principal remains overdue for more than 90 days, as per applicable RBI norms.
For borrowers, prolonged missed repayments can negatively affect their credit history and make it harder to access credit in the future. For banks and financial institutions, rising NPAs can reduce interest income, require higher provisioning and affect the ability to lend.
Read on to understand the NPA meaning, NPA full form, types of NPAs, GNPA and NNPA, examples and their impact on borrowers and lenders.
In banking, an NPA is a loan or advance that is no longer generating income for the lender because the borrower has failed to make the required repayments within the prescribed period. For a term loan, interest and/or principal remaining overdue for more than 90 days can result in the account being classified as an NPA.
A loan that continues to perform normally and meets the applicable repayment requirements is generally treated as a standard asset.
NPAs are further classified based on factors such as how long the account has remained non-performing.
1. Sub-Standard Assets
A sub-standard asset is an asset that has remained classified as an NPA for a period of up to 12 months.
Such an account carries greater credit risk than a standard asset but may still have reasonable recovery prospects.
2. Doubtful Assets
An asset becomes a doubtful asset after it has remained in the sub-standard category for more than the prescribed period, generally more than 12 months.
The longer a loan remains unpaid, the greater the uncertainty around its recovery.
3. Loss Assets
A loss asset is one that has been identified by the lender, its auditors or the regulator as being uncollectible or having such little recoverable value that continuing to treat it as a bankable asset is not appropriate.
However, some recovery value may still exist even if the asset has not yet been fully written off.
How do NPAs Work?
A loan does not become an NPA immediately after one missed EMI.
For a term loan, if the required interest and/or principal remains overdue for more than 90 days, the lender may classify the account as a Non-Performing Asset according to applicable RBI norms. The 90-day period should not be understood as a general repayment “grace period”; it is primarily a regulatory criterion used for asset classification. (idfcfirstbank)
Once an account becomes an NPA, the lender may:
Follow up with the borrower for repayment
Consider restructuring or resolution options, where permitted
Increase provisions against the stressed loan
Initiate recovery proceedings
Enforce security in the case of eligible secured loans, subject to applicable laws and procedures
Use other legal or regulatory recovery mechanisms
The recovery method depends on factors such as the type of loan, outstanding amount, security available and applicable regulations.
What Causes an NPA?
A loan can become an NPA for several reasons. In many cases, the underlying problem is that the borrower experiences financial stress and is unable to continue making repayments.
Common causes of NPAs include:
Loss of income: Job loss, salary reduction or interruption of regular income can make it difficult for an individual borrower to repay EMIs.
Business losses: Businesses may face weak sales, lower profits or prolonged cash-flow problems that affect their ability to service debt.
Economic slowdown: A downturn can reduce income and demand across industries, increasing repayment stress.
High debt burden: Borrowers with several existing loans and EMIs may find it difficult to manage repayments if their financial position changes.
Poor financial planning: Borrowing more than the repayment capacity can increase the chances of default.
Project delays: Businesses may struggle to repay loans when projects face delays, cost overruns or regulatory issues.
Unexpected events: Natural disasters, major disruptions or other unforeseen events may affect the borrower’s ability to generate income.
Weak credit assessment: In some cases, inadequate assessment of a borrower’s repayment capacity can contribute to future defaults.
NPAs can therefore arise from both borrower-specific problems and wider economic or business conditions.
What are GNPA and NNPA?
Banks and financial institutions make provisions to account for potential losses arising from stressed loans. Two commonly used measures for understanding the level of NPAs are Gross NPA (GNPA) and Net NPA (NNPA).
1. Gross Non-Performing Assets (GNPA)
Gross NPA represents the total value of loans and advances that have been classified as non-performing before adjusting for provisions.
A commonly used ratio is:
GNPA Ratio = (Gross NPAs ÷ Gross Advances) × 100
For example, if a bank has ₹500 crore in Gross NPAs against ₹10,000 crore of total advances, its GNPA ratio would be 5%.
A higher GNPA ratio generally indicates that a larger share of the lender’s loan portfolio is under stress.
2. Net Non-Performing Assets (NNPA)
Net NPA shows the remaining NPA exposure after adjusting Gross NPAs for applicable provisions and other prescribed adjustments.
In simple terms:
Net NPA = Gross NPA − Applicable Provisions and Adjustments
The ratio can be represented as:
NNPA Ratio = (Net NPAs ÷ Net Advances) × 100
A lower NNPA ratio generally indicates that the lender has provided for a larger portion of its stressed assets.
Non-Performing Asset Examples
Here are a few simple examples to understand the non-performing asset meaning.
Example 1: Personal Loan
Suppose a borrower takes a personal loan and initially pays the EMIs regularly. Later, due to a loss of income, the borrower stops making repayments.
If the required principal or interest remains overdue for more than 90 days, the lender may classify the loan as an NPA under applicable norms.
Example 2: Business Loan
Consider a business owner who has taken a ₹5 lakh business loan. Due to falling sales and prolonged cash-flow problems, the business becomes unable to service the loan.
If the repayment remains overdue beyond the prescribed period, the lender may classify the account as an NPA and initiate suitable recovery or resolution measures.
These examples show that an NPA is not a separate type of loan. It is a classification given to an existing loan or advance when it stops performing according to the applicable repayment norms.
Performing and Non-Performing Assets
The following table explains the difference between performing and non-performing assets:
Non-Performing Asset
Performing Asset
A loan or advance that is no longer generating the expected income for the lender
A loan or advance that continues to generate expected income
In the case of a term loan, principal and/or interest has remained overdue for more than 90 days
Repayments are being made according to applicable terms
Carries higher credit and recovery risk for the lender
Generally carries lower credit risk than an NPA
May require additional provisioning by the lender
Normally attracts standard provisioning as applicable
Can reduce lender profitability and restrict capital available for further lending
Generates regular interest income for the lender
Prolonged missed payments can negatively affect the borrower’s credit profile
Timely repayments can support a healthy credit history
This corrects the earlier risk classification: NPAs carry higher risk, whereas performing assets generally represent relatively lower credit risk.
Impact of Non-Performing Assets on the Banking Sector
A high level of NPAs can affect banks and financial institutions in several ways.
Reduced Interest Income
Banks primarily earn money by charging interest on loans. If borrowers stop making repayments, the expected interest income may no longer be recognised normally.
Higher Provisioning Requirements
Banks are required to set aside provisions against stressed loans. Higher provisioning can reduce reported profitability.
Reduced Lending Capacity
Money locked in stressed or unpaid loans cannot be recycled as efficiently into new lending.
Pressure on Profitability
A combination of lower interest income, additional provisioning and recovery expenses can reduce profitability.
Higher Credit Risk
A sustained increase in NPAs can indicate deterioration in the quality of a lender’s loan portfolio.
Therefore, GNPA and NNPA ratios are commonly used to assess a bank’s asset quality and overall financial health. (https://www.bajajfinserv.in)
How do Banks Recover NPAs?
Banks and financial institutions may use different recovery and resolution methods depending on the type and size of the loan, security available and applicable laws.
Before starting formal recovery proceedings, a lender may communicate with the borrower and explore permissible repayment or restructuring options.
Common NPA recovery mechanisms can include:
Asset Reconstruction Companies (ARCs): Banks may transfer eligible stressed assets to ARCs, which specialise in resolving and recovering such assets.
SARFAESI Act: For eligible secured loans, lenders may enforce security interests under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, subject to the conditions prescribed under the law.
Lok Adalats: Certain eligible disputes may be taken before Lok Adalats for settlement.
Debt Recovery Tribunals (DRTs): Banks and financial institutions can approach DRTs for recovery of eligible debts.
Debt Recovery Appellate Tribunals (DRATs): DRATs hear appeals against certain orders passed by DRTs.
Insolvency and Bankruptcy Code (IBC): Eligible corporate defaults may be addressed through insolvency resolution proceedings under the applicable provisions of the IBC.
Banks may also use settlement, restructuring and other permitted recovery mechanisms depending on the circumstances.
A Prompt Corrective Action (PCA) framework should not be presented as a direct loan-recovery method. It is primarily a supervisory framework used by the RBI for regulated entities facing financial stress.
NPAs can significantly affect both lenders and borrowers. For borrowers, prolonged missed repayments can damage their credit profile and make future borrowing more difficult. It is therefore important to borrow within your repayment capacity and make EMIs on time.
If you are looking to bridge monetary gaps, you can consider a Fibe Personal Loan. Eligible borrowers can access up to ₹10 lakh with flexible repayment tenures of up to 36 months and zero foreclosure charges, subject to applicable terms and conditions. Download the Fibe app or visit the Fibe website to get started.
FAQs on Non-Performing Assets
1.Why should customers be concerned about NPAs in banks?
High NPAs can affect a bank’s financial performance because they reduce interest income and may require higher provisions.
If NPAs rise significantly, a lender may become more cautious about extending new loans. However, the effect on customers depends on the overall financial strength, capital position, asset quality and regulatory position of the bank.
2.What are common methods banks use to recover NPAs?
Banks can use several methods to recover or resolve NPAs, including:
Asset Reconstruction Companies
SARFAESI proceedings for eligible secured loans
Debt Recovery Tribunals
Lok Adalats
Settlements or restructuring, where permitted
Insolvency proceedings under the IBC in applicable cases
The recovery route depends on the nature of the loan and applicable regulations.
3.How are NPAs classified and reported by banks?
NPAs are broadly classified into:
Sub-standard assets: Assets that have remained NPAs for up to 12 months
Doubtful assets: Assets that have remained in the sub-standard category beyond the prescribed period
Loss assets: Assets identified as uncollectible or of little recoverable value
Banks also report indicators such as Gross NPA and Net NPA to show the extent of stressed assets in their loan portfolios.
4.How does NPA resolution impact banking sector stability?
Effective NPA resolution can help banks recover funds, reduce stressed assets and release resources for productive lending.
Lower NPAs and adequate provisioning can support a lender’s profitability, asset quality and ability to extend new credit. Persistent high NPAs, on the other hand, can place pressure on profits and capital.
5.What is the full form of NPA?
The full form of NPA is Non-Performing Asset.
An NPA is a loan or advance that stops generating the expected income for a lender because the borrower has not met the applicable repayment obligations for the prescribed period.
For a term loan, principal and/or interest remaining overdue for more than 90 days can result in NPA classification under applicable RBI norms.
6.Does an NPA affect my CIBIL score?
Yes, the repayment behaviour that leads to a loan becoming an NPA can significantly affect your credit profile.
Lenders regularly report loan repayment information to credit bureaus. Missed or overdue EMIs can appear in your credit history and may reduce your CIBIL score. A poor repayment record can make it more difficult to qualify for new loans or credit cards and may result in less favourable borrowing terms.
Even after resolving the overdue amount, information relating to past repayment behaviour may continue to appear in your credit history for the applicable reporting period.
7.What are the main causes of an NPA?
Common causes of NPAs include:
Loss of employment or regular income
Business losses and cash-flow problems
Economic downturns
High existing debt
Poor financial planning
Project delays or cost overruns
Unexpected financial emergencies
Weak credit assessment
Prolonged inability to repay principal or interest
For individual borrowers, the most important way to reduce the risk of default is to borrow according to repayment capacity and make all EMIs on time.
