Rs. 100- Rs. 10 crore
Start investing with Rs. 100 | Easy KYC | Expert-managed funds
Read a Balance Sheet Like a Pro
In summary
NPAs indicate deterioration in the quality of a lender’s loan book. RBI norms prescribe when loans become non-performing and how lenders classify, provision, and report these assets.
- A term loan generally becomes an NPA when dues remain overdue for more than 90 days.
- SMA-0, SMA-1, and SMA-2 identify increasing levels of early loan stress.
- NPAs are classified as sub-standard, doubtful, or loss assets.
- Gross NPA measures bad loans before applicable provisions.
- Net NPA reflects NPAs after specified deductions and provisions.
- Recovery, restructuring, write-offs, and resolution can address stressed loan accounts.
RBI's asset-quality framework is designed to promote consistent recognition of stressed and non-performing loans across lenders.
What are non-performing assets?
A Non-Performing Asset (NPA) is a loan or advance that has stopped generating income for the lender because the borrower has not met the applicable repayment obligation.
For a term loan, RBI's framework generally treats an account as non-performing when interest and/or principal remains overdue for more than 90 days. Different criteria apply to certain facilities, such as overdrafts, cash credit accounts, bills purchased and discounted, and agricultural advances.
Therefore, an NPA is not simply any loan on which a borrower has missed one instalment. The applicable classification depends on the facility, overdue period, and regulatory requirements.
How are non-performing assets classified?
NPAs are classified as Substandard, Doubtful, or Loss assets based mainly on how long they have remained non-performing and their recoverability.
Substandard asset
A substandard asset is an account that has remained an NPA for 12 months or less.
It already shows clear credit weakness, but some recovery may still be possible.
Doubtful asset
A doubtful asset is an account that has remained in the NPA category beyond the substandard period.
Under the RBI framework, an asset generally becomes doubtful after remaining substandard for 12 months. The possibility of recovering the full amount is considered more uncertain.
Loss asset
A loss asset is one where the loss has been identified and the asset is considered largely uncollectible, although some recovery value may still remain.
Such assets should generally be written off. If they remain in the books, RBI requires 100% provisioning.
A standard asset, by comparison, is a performing asset and is not an NPA.
Why do loans become non-performing assets?
Loans can become NPAs when borrowers face financial stress or when weaknesses arise in lending, monitoring, or repayment.
Common causes include:
- Business losses: Falling sales or rising costs may make repayment difficult.
- Economic slowdown: Lower demand can weaken business cash flows.
- Poor credit assessment: A lender may overestimate the borrower's repayment ability.
- Excess borrowing: Borrowers may take on more debt than their income can support.
- Project delays: Delays can prevent a business from generating expected cash flow.
- Fund diversion: Borrowed money may be used for purposes other than those approved.
- Natural events: Floods, droughts, or other disruptions can affect income.
- Wilful default: A borrower may fail to repay despite having the capacity to do so.
Not every default has the same cause. Banks therefore examine the borrower's financial position and the account history before deciding the appropriate recovery approach.
How do NPAs affect banks?
NPAs can reduce bank profitability because interest income falls while provisioning requirements increase.
Their main effects include:
Lower income: A bank cannot continue recognising unrealised interest from an NPA in the same way as income from a performing loan.
Higher provisions: Banks must set aside money against possible losses.
Lower profits: Higher provisioning can reduce reported profits.
Capital pressure: Persistent loan losses can weaken capital available to support future lending.
Reduced lending ability: A stressed loan book may make a bank more cautious about granting fresh credit.
Higher recovery costs: Banks may spend time and money on restructuring, legal proceedings, security enforcement, or insolvency processes.
High NPA levels can therefore signal weakening asset quality.
How are Gross NPA and Net NPA measured?
Gross NPA and Net NPA ratios show how much of a bank's advances are affected by non-performing loans.
Gross NPA ratio
Gross NPA represents the total recognised NPAs before adjusting for eligible provisions and related deductions.
The commonly used ratio is:
Gross NPA Ratio = Gross NPAs ÷ Gross Advances × 100
For example, suppose a bank has:
- Gross advances: Rs. 1,000 crore
- Gross NPAs: Rs. 40 crore
The Gross NPA Ratio is:
Rs. 40 crore ÷ Rs. 1,000 crore × 100 = 4%
This means 4% of the bank's gross advances are classified as gross NPAs.
Net NPA ratio
Net NPA reflects the remaining NPA exposure after prescribed adjustments, including eligible provisions.
The broad ratio is:
Net NPA Ratio = Net NPAs ÷ Net Advances × 100
Gross and Net NPA ratios should not be confused with the proportion of NPAs to a bank's total assets.
What is NPA provisioning?
NPA provisioning means setting aside money to cover expected losses from non-performing loans.
The amount depends on the NPA category, security available, and the length of time the asset has remained doubtful.
For commercial banks, the RBI framework broadly provides:
| NPA category | Provisioning approach |
|---|---|
| Substandard | Generally 15% of total outstanding |
| Unsecured substandard | Generally 25% |
| Doubtful unsecured portion | 100% |
| Doubtful secured portion | 25% to 100%, depending on period |
| Loss asset | 100% if not written off |
Provisioning does not mean the bank has necessarily lost the entire loan amount. It is an accounting and prudential measure designed to recognise possible losses more realistically.
What is a simple example of an NPA?
A term loan can become an NPA when a borrower leaves a repayment overdue for more than 90 days.
Suppose a borrower takes a loan of Rs. 5 lakh and must pay monthly instalments.
An instalment becomes due on 1 January but remains unpaid. If the required principal or interest continues to remain overdue beyond the 90-day threshold, the lender can classify the account as an NPA according to RBI norms.
Before reaching that stage, the account may pass through SMA-0, SMA-1, and SMA-2 classifications.
The lender may then have to stop normal accrual-based recognition of unrealised interest, make the required provision, and begin appropriate recovery or resolution action.
Conclusion
Non-performing assets show that a lender is facing repayment stress in part of its loan book. For most term loans, an account becomes an NPA after principal or interest remains overdue for more than 90 days, although agricultural loans follow crop-season rules.
RBI requires banks to classify NPAs as Substandard, Doubtful, or Loss assets and make appropriate provisions. Tracking Gross and Net NPA ratios helps lenders, regulators, and investors understand asset quality and credit risk.
Last reviewed: September, 2026
Mutual funds are subject to market risks, read all scheme related documents carefully before investing.
Explore Investment Tools
Articles and Insights
Frequently Asked Questions
NPA meaning and classification
NPA recovery and examples
Related accounting terms
What are non-performing assets?
Non-performing assets are loans or advances that meet RBI's conditions for being classified as non-performing because repayments have remained overdue. For most term loans, principal or interest remaining overdue for more than 90 days can result in NPA classification.
What happens to non-performing assets?
Once an account becomes an NPA, the lender follows special income-recognition, provisioning, monitoring, and recovery rules. Depending on the case, the account may later be recovered, upgraded to standard status, restructured under applicable rules, transferred, or written off.
What are standard assets in NPA?
A standard asset is a performing loan that does not carry more than the normal level of credit risk and is not classified as an NPA. If it later meets the prescribed NPA conditions, it can move into the non-performing category.
How do lenders deal with NPA?
Lenders may seek repayment, enforce available security, use legal or insolvency routes, consider an eligible restructuring, or transfer stressed loans under applicable rules. The method depends on the borrower's position, security, viability of recovery, and regulatory requirements.
What is an example of a non-performing asset?
A term loan whose interest or principal remains overdue for more than 90 days is a common example of an NPA. Agricultural advances and some other credit facilities follow different RBI conditions, so the 90-day rule is not universal.
What are 10 examples of non-current assets?
Ten examples are land, buildings, plant and machinery, vehicles, furniture and fixtures, long-term computer equipment, patents, trademarks, goodwill, and long-term investments. Non-current assets are an accounting category for assets held over the longer term and should not be confused with non-performing assets.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
BFL does NOT:
(i) provide investment advisory services in any manner or form.
(ii) carry customized/personalized suitability assessment.
(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.
Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.
Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.
Disclaimer
Bajaj Finance Limited ("BFL") is an NBFC offering loans, deposits and third-party wealth management products.
The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.
Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.