Non-Performing Assets (NPA): Meaning, Types and Example

In the world of banking and finance, Non-Performing Assets (NPAs) are a red flag. They indicate loans where borrowers have stopped making repayments, which can seriously affect a bank’s financial health. A high level of NPAs impacts profitability, lending capacity, and even investor confidence.

In this blog, we’ll explain what is NPA, its types, classification, how NPAs work, and how India is addressing the NPA crisis.

What Is a Non-Performing Asset (NPA)?

A Non-Performing Asset (NPA) is a loan or advance for which the borrower has not paid interest or principal for more than 90 days. Once a loan remains overdue beyond this period, it is marked as an NPA on the bank’s balance sheet.

In simple terms, if you borrow money and stop paying EMIs for three months, your loan becomes a non-performing asset for the lender.

How NPA Works

Here’s how a regular loan turns into a non-performing asset:

• Loan Disbursal: The bank lends money to a borrower.

• Repayment Schedule: The borrower agrees to repay via EMIs.

• Default Begins: Missed payments for more than 90 days.

• NPA Classification: The bank labels it as an NPA.

• Provisioning: The bank sets aside funds for potential losses.

NPAs reduce interest income and increase credit risk, pushing banks to be more conservative in their lending.

Types of Non-Performing Assets

According to the Reserve Bank of India (RBI), NPAs are classified based on the duration of non-repayment:

1. Substandard Assets

• Remain NPA for ≤ 12 months

• Risk of loss is moderate

• Potential for partial recovery still exists

2. Doubtful Assets

• Remain substandard for > 12 months

• Higher risk, recovery is uncertain

• Require higher provisioning by banks

3. Loss Assets

• Considered non-recoverable

• Identified by auditors or RBI

• Written off even if legal recovery is still ongoing

This NPA classification helps banks apply the right provisioning rules and better understand the health of their loan portfolio.

Measuring NPA Levels

Banks assess their asset quality using Gross and Net NPA Ratios:

NPA Ratio Formula

• Gross NPA: Total outstanding NPAs before provisions

• Net NPA: Gross NPAs minus provisions

Example:

• Gross Advances = ₹1,000 crore

• Gross NPAs = ₹80 crore

• Gross NPA Ratio = (80 ÷ 1,000) × 100 = 8%

This means 8% of the bank’s loans are non-performing, which is a key metric for investors and regulators.

NPA Example

Let’s say a small business takes a loan of ₹20 lakh to expand operations. It’s required to repay in EMIs over five years. However, due to financial challenges, it misses payments for four consecutive months.

• After 90 days, the loan becomes an NPA

• The bank must classify and provision for the expected loss

• Depending on how long the default continues, the NPA may move from substandard to doubtful, or even loss asset

NPA in India: The Bigger Picture

India has faced high NPA levels, especially post-2014 due to stressed sectors like infrastructure, real estate, and power. To combat this, several initiatives were launched:

• IBC (Insolvency and Bankruptcy Code) for faster resolution

• SARFAESI Act for secured asset recovery

• Bad Bank setup (NARCL) to buy and clean bad loans from bank books

• Debt Recovery Tribunals (DRTs) for legal enforcement

How Can NPAs Be Recovered?

Banks in India use a variety of mechanisms to recover NPAs:

• Loan restructuring or rescheduling

• Asset sale to ARCs (Asset Reconstruction Companies)

• SARFAESI Act enforcement

• Insolvency proceedings under IBC

• Out-of-court settlements or one-time settlements (OTS)

Conclusion

Non-Performing Assets (NPAs) are a critical measure of a bank’s asset quality and financial strength. They represent loans that aren’t generating income and may never be repaid. By understanding how NPAs work, their types, and how they’re managed, stakeholders can better judge a bank’s performance and the soundness of the financial system.

India continues to tackle the NPA problem with regulatory reforms, but proactive credit appraisal, effective monitoring, and faster resolution remain key.