Non-Performing Assets (NPA) - Meaning, Types & Examples

Ganesh Salunkhe
May 27, 2024
2 min read

What is a Non-Performing Asset (NPA)?

A Non-Performing Asset (NPA) in the banking industry refers to loans or advances for which the principal or interest payments remain overdue for a period exceeding 90 days. NPAs are also known as ‘distressed assets’ or ‘bad assets’. These are problematic for banks as they stop generating income, impacting the bank's financial health.

Types of NPAs

The Reserve Bank of India (RBI) classifies NPAs into several categories:

Standard Assets: These are loans that do not pose any risk and continue to generate income for the bank.
Sub-standard Assets: Loans overdue for less than 12 months fall into this category. They carry more risk than standard assets.
Doubtful Assets: Loans that remain in the sub-standard category for over 12 months. The collection or liquidation of these assets is highly doubtful.
Loss Assets: These are loans identified by the bank or regulatory authorities as uncollectible and of little value, though they may have some residual recovery value.

How NPAs Work

When a borrower defaults on a loan and fails to make payments for 90 days, the loan is classified as an NPA. The bank records the asset as non-performing on its balance sheet and may initiate recovery procedures, such as seizing collateral or selling the debt to a collection agency.

NPA Provisioning

To manage the risk posed by NPAs, banks set aside a portion of their profits as provisions. This process, known as NPA provisioning, ensures that banks can cover potential losses from bad debts. The amount set aside depends on the risk level and the type of asset.

Gross and Net NPAs

Gross Non-Performing Assets (GNPA): The total value of NPAs before any provisions.
Net Non-Performing Assets (NNPA): The value of NPAs after deducting provisions.

NPA Ratios

Banks calculate NPA ratios to assess the extent of bad loans:

GNPA Ratio: The ratio of gross NPAs to total advances.
NNPA Ratio: The ratio of net NPAs to net advances.

NPA Scenario in India

The NPA situation in India has seen improvements:

As of March 31, 2023, NPAs stood at Rs 1.96 lakh crore.
Projected to drop to 4.5% by FY2023-24.
A significant reduction from Rs 9,33,779 crore in March 2019 to Rs 5,71,515 crore in March 2023, due to measures like the Insolvency and Bankruptcy Code and amendments to the SARFAESI Act.

Practical Example

Consider a business loan of Rs 10 lakh with regular repayments for nine months. If payments stop from the 10th month and remain unpaid for three more months, the loan becomes an NPA. The bank will then start recovery processes.

Credit Score and Loans

Credit scores play a critical role in assessing a borrower's repayment ability. IIFL Finance requires a minimum CIBIL score of 675 for business loans and provides an option to check the CIBIL score online.

By understanding and managing NPAs effectively, banks can maintain financial stability and reduce the risk associated with bad loans.