NPA
A Non-Performing Asset (NPA) is a loan or advance on a bank's books where the borrower has not made interest or principal repayments for 90 days or more, indicating credit stress and requiring provisioning by the lender.
Non-Performing Assets represent the most critical measure of asset quality in Indian banking. Under RBI guidelines, a loan is classified as an NPA if interest or principal remains overdue for more than 90 days for term loans, or if the account remains out of order for more than 90 days for cash credit and overdraft accounts. Once classified, banks must set aside provisions from their profits, reducing net interest income and return on equity.
NPAs are categorised into three sub-classes based on the duration of default: sub-standard assets (up to 12 months of NPA status), doubtful assets (more than 12 months), and loss assets (where the outstanding amount is uncollectible even if not yet fully written off). Provisioning requirements escalate across these categories, from 15% for sub-standard to up to 100% for loss assets, severely impacting bank profitability. The gross NPA ratio measures the raw stock of bad loans as a fraction of total advances, while the net NPA ratio deducts provisions already held.
India experienced a severe NPA crisis between 2015 and 2020, particularly in state-owned banks that had aggressively lent to infrastructure, steel, power, and real estate sectors. The RBI's asset quality review of 2015–16 forced banks to recognise previously hidden stress, causing gross NPA ratios at some public-sector banks to exceed 20%. The Insolvency and Bankruptcy Code, 2016, provided a time-bound resolution mechanism that improved recovery prospects and gradually reduced the NPA overhang through the National Company Law Tribunal process.
For equity investors, elevated NPA ratios are a red flag because high provisioning drains earnings and erodes book value. Return on assets and return on equity deteriorate sharply as credit costs mount. Banks with high NPAs also face capital adequacy pressure, sometimes requiring government recapitalisation for public-sector banks. Credit rating agencies and analysts closely track slippage ratios — the share of performing assets turning non-performing — as a leading indicator of future NPA trends.
A common misconception is that a bank's reported gross NPA ratio captures all potential future stress. In reality, restructured loans, special mention accounts (SMA-0, SMA-1, SMA-2), and accounts under resolution frameworks may be performing on paper but carry elevated credit risk. Investors benefit from looking at the total stressed asset pool — gross NPAs plus restructured accounts — for a more complete picture of asset quality.