The Non-Performing Asset (NPA) is a core concept in Indian banking, defined by the Reserve Bank of India (RBI) as a loan or advance that ceases to generate income for the bank. A loan is classified as an NPA if the interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. For Cash Credit/Overdraft (CC/OD) accounts, the NPA classification applies if the account remains 'Out of order' for over 90 days.
The concept's origin lies in the recommendations of the Narasimham Committee Report (1991), which aimed to introduce prudential norms for income recognition and asset classification to align Indian banking with international standards. Before 1991, banks lacked a standardized system for classifying bad loans. The current 90-day overdue norm was made applicable from the year ended March 31, 2004, replacing the earlier 'past due' concept.
The mechanism is governed by the RBI's guidelines on Income Recognition, Asset Classification, and Provisioning (IRACP). Once an account is classified as NPA, banks must stop recognizing interest income on an accrual basis and shift to a cash basis. NPAs are categorized into Substandard Assets (NPA for up to 12 months), Doubtful Assets, and Loss Assets, with banks required to set aside mandatory reserves called provisions based on the category.
The NPA framework connects directly to major resolution mechanisms like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, which allows banks to enforce security interests, and the Insolvency and Bankruptcy Code (IBC), 2016, which provides a time-bound process for debt resolution. Loans showing early signs of stress are flagged as Special Mention Accounts (SMA), categorized as SMA-0, SMA-1, and SMA-2, before turning into an NPA.
A significant recent change came with the RBI circular of November 12, 2021, which clarified that an NPA account can only be upgraded to a 'Standard' asset if the entire arrears of interest and principal are paid by the borrower. Furthermore, the classification of SMA/NPA is now mandated to be done as part of the day-end process for the relevant date.