Non-Performing Assets (NPAs), or bad loans, are one of the most asked topics in banking awareness and in RBI Grade B / NABARD descriptive papers. This guide explains RBI’s IRACP norms (Income Recognition, Asset Classification and Provisioning) in simple steps.
What is an NPA?
A loan or advance becomes an NPA when interest or principal remains overdue for more than 90 days.
| Type of loan | Becomes NPA when |
|---|---|
| Term loan | Interest/instalment overdue for more than 90 days |
| Cash credit / overdraft | Account stays “out of order” for 90 days |
| Bills purchased/discounted | Bill remains overdue for more than 90 days |
| Short-duration crops | Instalment overdue for two crop seasons |
| Long-duration crops | Instalment overdue for one crop season |
“Overdue” means any amount not paid on the due date. Banks must flag overdue accounts on a daily basis (day-end process), as per RBI’s November 2021 clarification.
Early warning: Special Mention Accounts (SMA)
Before an account turns NPA, banks tag it as SMA so that stress is spotted early.
| Category | Overdue period (principal or interest) |
|---|---|
| SMA-0 | 1–30 days |
| SMA-1 | 31–60 days |
| SMA-2 | 61–90 days |
For cash credit/overdraft accounts, SMA-1 and SMA-2 are based on the account being out of order for 31–60 and 61–90 days. SMA data for large borrowers is reported to CRILC (Central Repository of Information on Large Credits).
Asset classification
Once an account is an NPA, it moves through categories based on how long it has stayed an NPA.
| Category | Condition |
|---|---|
| Standard asset | Performing; not an NPA |
| Substandard asset | NPA for up to 12 months |
| Doubtful asset | Remained substandard for 12 months (D1: up to 1 year as doubtful; D2: 1–3 years; D3: more than 3 years) |
| Loss asset | Identified as uncollectible by the bank, auditors or RBI, but not yet written off |
Provisioning norms
Provisioning means setting aside money from profits to cover possible loan losses.
| Category | Provision required |
|---|---|
| Standard assets | 0.40% in general (0.25% for farm and SME loans; up to 1% for commercial real estate) |
| Substandard | 15% (25% if unsecured) |
| Doubtful D1 | 25% of secured portion + 100% of unsecured portion |
| Doubtful D2 | 40% of secured portion + 100% of unsecured portion |
| Doubtful D3 | 100% |
| Loss asset | 100% |
Gross NPA vs Net NPA
| Term | Meaning |
|---|---|
| Gross NPA (GNPA) | Total NPAs before deducting provisions |
| Net NPA (NNPA) | Gross NPA minus provisions |
| Provision Coverage Ratio (PCR) | Provisions ÷ Gross NPA × 100 (higher is safer) |
Indian banks’ GNPA ratio has fallen to around 2.2–2.5% (approx) in recent RBI Financial Stability Reports, a multi-year low, compared with over 11% in 2018.
Upgradation rule
An NPA account can be upgraded to standard only when all arrears of interest and principal are fully paid. Paying only part of the overdue amount does not upgrade the account. This rule was made strict by RBI’s November 2021 circular.
Income recognition
Banks cannot book interest income on an NPA until it is actually received (cash basis). Interest already booked but not received must be reversed when the account turns NPA.
The new ECL framework (from April 2027)
RBI has issued final directions to move banks from the current “incurred loss” model to an Expected Credit Loss (ECL) model, effective 1 April 2027 (as reported).
| Stage | Meaning | Provision based on |
|---|---|---|
| Stage 1 | Performing loans | 12-month expected loss |
| Stage 2 | Significant rise in credit risk (e.g. overdue 30+ days) | Lifetime expected loss |
| Stage 3 | Credit-impaired (roughly NPA) | Lifetime expected loss |
Under ECL, banks provide for losses before they actually happen, which makes balance sheets more forward-looking. Banks are expected to get a transition period (approx up to 2031) to spread the extra provisions.
How banks recover bad loans
| Tool | Key point |
|---|---|
| SARFAESI Act, 2002 | Banks can seize and sell secured assets without going to court (for loans above ₹1 lakh where secured) |
| Debt Recovery Tribunals (DRTs) | For recovery of loans of ₹20 lakh and above (approx threshold) |
| IBC, 2016 | Time-bound insolvency resolution through NCLT |
| Lok Adalats | For small loans, settlement by compromise |
| Asset Reconstruction Companies (ARCs) | Buy bad loans from banks |
| NARCL | National Asset Reconstruction Company Ltd, the “bad bank” set up in 2021 |
Exam-ready one-liners
- A loan becomes an NPA when overdue for more than 90 days.
- SMA-0: 1–30 days; SMA-1: 31–60 days; SMA-2: 61–90 days.
- Substandard: NPA up to 12 months; doubtful: after 12 months as substandard.
- Provision for substandard assets: 15% (25% unsecured).
- D3 and loss assets need 100% provision.
- An NPA is upgraded only when all arrears are cleared.
- ECL-based provisioning applies from 1 April 2027 with three stages.
- NARCL is India’s bad bank (2021).
Related reading
- Basel III norms explained
- Repo, reverse repo, CRR and SLR explained
- 100 banking abbreviations for exams
Quiz: test yourself
Based on RBI’s IRACP Master Circular and ECL directions as reported. Thresholds may change; check the latest RBI circulars.