Non-Performing Asset (NPA) Definition and Classification
Relevent for JAIIB PPB | CAIIB ABM | CCP Module E
Why It Matters in Branch:
NPA identification is a core skill for every bank officer. Misclassification of NPA is a regulatory violation. Knowing classification rules protects you from audit findings.
SHORT NOTES
NON-PERFORMING ASSET (NPA) DEFINITION (RBI Master Circular):
An asset (loan/advance) becomes NPA if interest or principal remains overdue for more than 90 days.
For agricultural loans: NPA if interest or principal remains overdue for 2 crop seasons (short duration crops) or 1 crop season (long duration crops).
For OD/CC accounts: Account becomes NPA if it remains ‘out of order’ for 90 days.
Out of order = outstanding balance continuously exceeds sanctioned limit, OR no credit for 90 days, OR credits are not adequate to cover interest.
ASSET CLASSIFICATION — 4 CATEGORIES:
1. STANDARD ASSETS
- Performing asset — no default in payment
- Normal risk — provisions: 0.25% to 1% (varies by sector)
2. SUB-STANDARD ASSETS
- NPA for less than or equal to 12 months
- Provisions: 15% on secured portion, 25% on unsecured portion
- Contains well-defined weakness — bank relies on collateral for recovery
3. DOUBTFUL ASSETS
- NPA for more than 12 months
Sub-categories:
- Doubtful 1 (D1): NPA for 1-3 years — Provision: 25% (secured), 100% (unsecured)
- Doubtful 2 (D2): NPA for 3-4 years — Provision: 40% (secured), 100% (unsecured)
- Doubtful 3 (D3): NPA for more than 4 years — Provision: 100% (secured), 100% (unsecured)
4. LOSS ASSETS
- Loss has been identified by bank/auditor/RBI inspector
- Not yet written off but considered uncollectable
- Provision: 100%
- Should be written off — continuing to show on books is misleading
INCOME RECOGNITION:
On NPA accounts, interest income is NOT recognised on accrual basis.
Interest is recorded only when actually received (cash basis).
This prevents banks from showing unrealised income as profit.
GROSS NPA vs NET NPA:
Gross NPA = Total NPA before provisions
Net NPA = Gross NPA – Provisions held
Net NPA ratio is the true measure of credit quality.
BRANCH CONTEXT
✦ The 90-day NPA rule is very clear, but identifying ‘out of order’ CC accounts requires daily vigilance. We should review CC accounts every week to catch accounts where debits are happening but credits are not covering interest — these are NPAs in the making. Early identification and proactive follow-up is far better than waiting for the 90-day trigger.