NPA in Indian Banking: Understanding Non-Performing Assets

Introduction: When Loans Go Bad

In 2018, headlines screamed about India’s “NPA crisis”—public sector banks were drowning in bad loans, some had losses for the first time in decades, and the government was pumping in lakhs of crores to keep them afloat. Names like Vijay Mallya, Nirav Modi, and Mehul Choksi became synonymous with loan defaults and fraud.

But what exactly is an NPA? Why does it matter if some loans aren’t repaid? And how does it affect you as a depositor or investor? This guide demystifies the NPA issue that has been central to Indian banking discussions.

What is an NPA?

Definition

Non-Performing Asset (NPA): A loan or advance where principal and/or interest payment remains overdue for more than 90 days.

In Simple Terms: When a borrower stops paying EMIs for more than 90 days, the loan becomes an NPA (or “bad loan”).

The 90-Day Rule

Timeline:

Day 0: EMI due date
Day 1-30: Standard asset (SMA-0)
Day 31-60: Special Mention Account-1 (SMA-1)
Day 61-90: Special Mention Account-2 (SMA-2)
Day 91+: Non-Performing Asset (NPA)

Why 90 Days?

• International norm (Basel standards)
• Enough time for temporary defaults
• Practical benchmark
• Uniform across banking system

NPA Classification

Asset Classification Categories

Sub-standard Assets

• NPA for up to 12 months
• Still has potential for recovery
• Provision: 15%

Doubtful Assets

• NPA for more than 12 months
• Recovery is questionable
• Provision increases with time

Loss Assets

• Identified as uncollectable
• No realistic recovery prospect
• Full provision required (100%)
• May be written off

Gross NPA vs Net NPA

Gross NPA

Definition: Total NPAs before any provisions.

Formula: Gross NPA = Total NPAs / Total Advances × 100

Net NPA

Definition: NPAs after deducting provisions.

Formula: Net NPA = (Gross NPA - Provisions) / (Total Advances - Provisions) × 100

Example

Bank XYZ:
Total Advances: ₹10,000 crores
Total NPAs: ₹1,000 crores
Provisions Made: ₹600 crores

Gross NPA Ratio: ₹1,000 / ₹10,000 = 10%
Net NPA Ratio: (₹1,000 - ₹600) / (₹10,000 - ₹600) = 4.26%

Which Matters More?

Investors look at both:

• High Gross NPA = Poor asset quality
• Low Net NPA = Adequate provisioning

Current NPA Scenario in India

Historical Trend

Observation: NPAs have significantly declined from peak of 11.2% (2018) to below 3% (2024).

Bank-wise NPA Comparison (2024 Approx)

Sectoral Distribution

High NPA Sectors:

• Infrastructure (power, roads)
• Real estate
• Textiles
• Aviation
• Steel and metals

Lower NPA Sectors:

• Retail loans
• Agriculture (subsidized)
• Services

Causes of NPAs

External Factors

1. Economic Slowdown

• Reduced demand
• Business failures
• Job losses

2. Policy Changes

• Project delays
• Regulatory changes
• Environmental clearances

3. Global Factors

• Commodity price crashes
• Global recession
• Currency fluctuations

Internal Factors (Bank-side)

1. Poor Credit Appraisal

• Inadequate due diligence
• Aggressive lending
• Over-optimistic projections

2. Insufficient Monitoring

• Lack of early warning systems
• No periodic review
• Delayed action

3. Governance Issues

• Political pressure
• Fraudulent lending
• Conflict of interest

Borrower-side Factors

1. Willful Default

• Intentional non-payment
• Fund diversion
• Fraud

2. Business Failure

• Genuine loss
• Market changes
• Competition

3. Over-leveraging

• Too much debt
• Unable to service

Impact of NPAs

On Banks

1. Income Loss

• No interest income from NPAs
• Interest reversal required

2. Provisioning Burden

• Provisions hit profits
• Reduces capital

3. Capital Erosion

• Net worth declines
• CAR (Capital Adequacy) affected

4. Business Constraints

• Less money to lend
• Growth impacted

On Economy

1. Credit Crunch

• Banks cautious in lending
• Deserving borrowers suffer

2. Growth Impact

• Less credit = less investment
• GDP growth affected

3. Fiscal Burden

• Government recapitalizes PSBs
• Taxpayer money used

On Depositors

Indirect Impact:

• Lower deposit rates (bank needs margins)
• Bank failures (extreme cases)
• Service quality issues

But:

• Deposits insured up to ₹5 lakh (DICGC)
• Large banks rarely fail

NPA Recognition: Raghuram Rajan’s Cleanup

Before 2015

Evergreening: Banks would restructure loans repeatedly, avoiding NPA classification.

Result: True bad loan position hidden.

Asset Quality Review (2015-16)

Raghuram Rajan’s Initiative:

• RBI directed banks to recognize hidden NPAs
• Strict classification rules
• No evergreening tolerance

Result:

• NPAs shot up (recognition, not creation)
• True picture emerged
• Banks booked massive losses

Legacy

Lesson: The NPAs existed before—Rajan made banks acknowledge them.

NPA Resolution Mechanisms

1. Insolvency and Bankruptcy Code (IBC) - 2016

Landmark Reform:

• Time-bound resolution (330 days)
• Creditor-driven process
• NCLT (National Company Law Tribunal) adjudicates

Process:

Default occurs
    ↓
Creditors approach NCLT
    ↓
Insolvency Professional appointed
    ↓
Resolution plan sought (180 days + 90 extension)
    ↓
Approval by Committee of Creditors (66%)
    ↓
Resolution or Liquidation

Success Stories:

2. SARFAESI Act

Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act:

• Banks can seize collateral without court
• Applicable to secured loans
• 60-day notice to borrower

3. Debt Recovery Tribunals (DRT)

• Specialized tribunals
• For loans above ₹20 lakh
• Faster than civil courts

4. Lok Adalats

• For smaller loans
• Mutual settlement
• No appeal

5. Asset Reconstruction Companies (ARCs)

• Buy bad loans from banks
• Recover through their methods
• Banks get immediate (discounted) cash

6. National Asset Reconstruction Company (NARCL/Bad Bank)

Government Initiative (2021):

• Buy large NPAs from PSBs
• Centralized resolution
• Government-backed

Provisioning and Write-offs

What is Provisioning?

Setting aside money from profits to cover potential losses from NPAs.

Example:

Loan: ₹100 crore
Classification: Doubtful 1 (25% provision)
Provision: ₹25 crore (charged to P&L)

What is Write-off?

Removing the NPA from books after full provision.

Important:

• Write-off ≠ loan forgiven
• Bank still tries to recover
• Tax benefit on write-off
• Removes from balance sheet

Write-off Controversy

Common Misunderstanding: “Banks write off loans—waive them for willful defaulters!”

Reality:

• Write-off is accounting treatment
• Recovery efforts continue
• Legal cases filed
• Properties attached

Statistics: Banks recover ~20-25% of written-off loans over time.

Measures to Control NPAs

RBI Initiatives

1. Prompt Corrective Action (PCA)

• Early intervention for weak banks
• Restrictions on lending, branches
• Forces improvement

2. Large Exposure Framework

• Limits to single borrower
• Diversification required

3. Resolution Framework

• Early recognition
• Clear timelines
• Penalties for delays

Bank-Level Measures

1. Better Credit Appraisal

• Enhanced due diligence
• Industry analysis
• Cash flow assessment

2. Monitoring Systems

• Early Warning Signals (EWS)
• Regular review
• Quick action on stress

3. Specialized Teams

• Stressed asset management
• Recovery cells
• Legal teams

Government Actions

1. Recapitalization

• Infusing capital into PSBs
• ₹3.5+ lakh crore since 2017

2. Bank Mergers

• Consolidating weak banks
• Creating larger entities

3. IBC Implementation

• Fast-tracking resolution
• Deterrent effect on defaults

How NPAs Affect Your Bank Selection

Checking Bank Health

Look For:

Red Flags

⚠️ Very high NPA ratios ⚠️ Multiple years of losses ⚠️ Under PCA restrictions ⚠️ Management issues ⚠️ Frequent fraud news

Safe Banks for Deposits

Generally Safer:

• Large PSBs (SBI, BoB, Canara)
• Large private banks (HDFC, ICICI, Kotak)
• Banks with low NPAs

Exercise Caution:

• Small cooperative banks
• Banks under PCA
• Banks with governance issues

Key Takeaways

1. NPA = 90+ days overdue – Loan becomes bad after 90 days default
2. Gross vs Net NPA – Gross is total, Net is after provisions
3. NPAs declining – From 11% peak to below 3% now
4. IBC is key reform – Time-bound resolution since 2016
5. Write-off ≠ waiver – Recovery efforts continue
6. Provisioning protects banks – Money set aside for losses
7. Your deposits are safe – DICGC coverage + large bank stability

Disclaimer

This article is for educational purposes only. NPA data and bank health change frequently. For investment decisions, verify current data from RBI and bank reports. This is not financial advice.

Frequently Asked Questions

Q: What happens to my deposit if bank has high NPA? A: Deposits are insured up to ₹5 lakh. Large banks rarely fail even with high NPAs due to government support.

Q: Does NPA mean the borrower is forgiven? A: No. NPA is classification. Recovery efforts continue. Legal cases are filed.

Q: Why did NPAs suddenly rise in 2016-18? A: They were always there but hidden. RBI’s Asset Quality Review forced recognition.

Q: Is IBC working? A: Yes. Recovery rates better than pre-IBC. Time-bound resolution. Creditor-friendly.

Q: What is willful defaulter? A: Borrower who has capacity to pay but deliberately doesn’t. Banks report to RBI, legal action taken.

Q: Should I avoid banks with high NPAs? A: For deposits, large PSBs are safe regardless. For investments (stocks), low NPA banks are preferable.

NPAs are the banking system’s way of acknowledging that not all loans get repaid. While high NPAs stress banks and economy, India’s recent progress in reducing NPAs through IBC and better practices is a significant achievement. For depositors, understanding NPAs helps in making informed choices.