non-performing asset

A non-performing asset (NPA) is a credit facility — a term loan, cash credit, overdraft, or bill purchased — that has ceased to generate income for a bank because the borrower has defaulted on scheduled payments. The Reserve Bank of India, under the powers of the Banking Regulation Act, 1949 and through its Master Circular on Income Recognition, Asset Classification and Provisioning (IRACP) norms, defines an asset as non-performing when interest and/or instalment of principal remains overdue for more than 90 days in respect of a term loan, when an account remains "out of order" for 90 days in cash credit/overdraft, or when a bill remains overdue for 90 days. The 90-day delinquency norm was adopted from the year ending 31 March 2004, replacing the earlier 180-day standard, aligning India with international Basel practice following the recommendations of the Narasimham Committee (1991 and 1998) on the financial system.

NPAs are sub-classified by the duration and recoverability of default. A sub-standard asset is one that has remained an NPA for up to 12 months; a doubtful asset has remained sub-standard for 12 months or more; and a loss asset is one identified as uncollectible by the bank, auditor, or RBI inspection, where the realisable value is negligible. Against each category, banks must make graded provisioning from profits — higher provisioning for doubtful and loss assets — which directly erodes profitability and capital adequacy (CRAR under Basel III). The aggregate measure used in policy discourse is the Gross NPA ratio (gross NPAs to gross advances) and the Net NPA ratio (net of provisions). Restructured but still-stressed loans are captured under the broader stressed assets umbrella.

India's banking system, particularly public sector banks, faced a severe NPA crisis peaking around March 2018 when the system Gross NPA ratio reached roughly 11.2 percent, driven by the post-2008 corporate credit "twin balance sheet problem" in infrastructure, power, steel, and telecom. The RBI's Asset Quality Review (AQR) of 2015 forced honest recognition of hidden bad loans. Resolution mechanisms include the Insolvency and Bankruptcy Code, 2016 (IBC), the SARFAESI Act, 2002, Debt Recovery Tribunals, the National Asset Reconstruction Company Limited (NARCL or "bad bank") operationalised in 2022, and earlier schemes such as the 5/25 scheme and S4A. By 2023–24 the system Gross NPA ratio had fallen to a multi-decade low of around 2.8 percent, reflecting recoveries, write-offs, and IBC resolutions.

For the UPSC Indian Economy paper (GS Paper III — banking, financial sector reforms, and mobilisation of resources), NPAs are a recurring high-yield topic. Prelims questions test the 90-day definition, the asset classification hierarchy, and the distinction between gross and net NPAs; Mains questions probe the causes of the twin balance sheet problem, the efficacy of the IBC and SARFAESI, the rationale for NARCL, and provisioning's impact on bank lending capacity. Candidates should be able to name the Narasimham Committee, the AQR, and current Gross NPA figures from the latest RBI Financial Stability Report.