A Non-Performing Asset (NPA) is a loan or advance that stops generating income for a bank because the borrower has failed to make the required payment for the prescribed period. Under RBI norms, a loan generally becomes an NPA when interest or principal remains overdue for more than 90 days.
For a bank, loans are income-generating assets because the interest paid by borrowers forms an important source of revenue. When repayments stop, the loan no longer produces the expected income and is therefore treated as a non-performing asset.
Banks are required to identify and report NPAs and maintain adequate provisions against possible losses.
Classification of NPAs
RBI guidelines broadly divide NPAs into three categories:
Substandard Assets
A loan classified as an NPA for up to 12 months is generally treated as a substandard asset.
Doubtful Assets
When a substandard asset remains in that category for 12 months, it moves into the doubtful category.
Loss Assets
These are assets that are considered largely uncollectible and have little or no realistic value as a bank asset, even though some recovery may still be possible.
What is NPA Provisioning?
Provisioning is the practice of setting aside money to absorb potential losses from stressed loans.
The amount that a bank needs to provide depends on the nature and risk of the asset and the applicable regulatory requirements. As the possibility of recovery decreases, the provisioning requirement generally increases.
Provisioning protects the bank’s balance sheet by ensuring that expected loan losses are recognised rather than ignored.
GNPA and NNPA
Two measures are commonly used to understand the level of bad loans in a bank.
Gross NPA (GNPA) refers to the total amount of loans classified as NPAs before adjusting for provisions.
Net NPA (NNPA) represents the remaining NPA amount after deducting applicable provisions and other permitted adjustments. It therefore gives a better indication of the residual stress faced by the bank.
NPA Ratios
NPAs are also expressed as a percentage of advances:
GNPA Ratio = Gross NPAs ÷ Gross Advances × 100
NNPA Ratio = Net NPAs ÷ Net Advances × 100
A rising NPA ratio generally signals deterioration in the quality of a bank’s loan portfolio.
NPA Crisis in India
India experienced a sharp increase in stressed bank loans during the 2010s, particularly in large corporate accounts.
According to the figures provided, India’s NPAs reached a peak of approximately ₹10.36 lakh crore in 2018. They subsequently declined to around ₹5.71 lakh crore by March 2023, supported by measures such as loan write-offs and recovery efforts.
Scheduled commercial banks reported gross NPAs of approximately ₹9.33 lakh crore as of 31 March 2019, reflecting the scale of the banking-sector stress at that time.
A significant portion of the problem was concentrated in sectors such as manufacturing, energy, construction and infrastructure.
Major Corporate Loan Defaults
Several large corporate accounts became prominent during the NPA crisis. The figures provided include:
- Essar Steel India: ₹69,360 crore
- Videocon Industries: ₹58,052 crore
- Reliance Communications: ₹46,659 crore
- Bhushan Power & Steel: ₹41,400 crore
- Jaiprakash Associates: ₹36,591 crore
A number of these cases subsequently entered insolvency and resolution proceedings.
Impact of NPAs on the Economy
The consequences of high NPAs extend beyond individual banks.
Reduced Credit Availability
When a significant portion of bank funds is tied up in stressed loans, banks have less flexibility to provide fresh credit to productive sectors.
Pressure on Bank Profits
Banks must make provisions for potential losses on bad loans. Higher provisioning can reduce profitability and weaken their financial position.
More Cautious Lending
Persistent loan stress may make banks more selective in approving new loans. This can affect both the availability and cost of credit.
Lower Investment and Employment
Limited access to finance can discourage businesses from expanding, investing and creating new jobs, affecting overall economic activity.
Risk to Financial Stability
A large concentration of stressed loans, particularly among major corporate borrowers, can create broader risks for the banking and financial system.
How Can the NPA Problem Be Addressed?
The best approach is to prevent weak loans from becoming NPAs in the first place while ensuring quick resolution when stress emerges.
Key measures include:
- Strengthening credit appraisal before sanctioning loans.
- Closely monitoring borrowers after loan disbursement.
- Improving banks’ risk-management systems.
- Ensuring faster recovery and resolution of stressed assets.
- Making effective use of the insolvency and bankruptcy framework.
- Strengthening accountability in large corporate lending.
- Improving governance and regulatory supervision.
Conclusion
NPAs are an important indicator of the health of the banking sector. A high level of bad loans can reduce profitability, restrict fresh lending and weaken economic activity.
India’s experience with the NPA crisis highlights the need for sound lending decisions, continuous monitoring, timely recovery and effective regulation. A stronger approach to managing stressed assets can improve the resilience of banks and support sustainable economic growth.
FAQs on Non-Performing Assets
1. What is an NPA?
An NPA is a loan or advance that stops generating income for a bank because the required principal or interest payment remains overdue for more than 90 days, subject to applicable RBI norms.
2. What are the three categories of NPAs?
NPAs are broadly classified as substandard, doubtful and loss assets.
3. What is Gross NPA?
Gross NPA is the total value of loans classified as non-performing before adjusting for provisions.
4. What is Net NPA?
Net NPA is the NPA amount remaining after deducting applicable provisions and other permitted adjustments.
5. What does NPA provisioning mean?
It means setting aside funds to cover potential losses arising from bad or stressed loans.
6. Why are high NPAs harmful to banks?
High NPAs increase provisioning requirements, reduce profitability and can limit a bank’s ability to provide fresh loans.
7. Which sectors were significantly affected during India’s NPA crisis?
The major areas of corporate stress included manufacturing, energy, construction and infrastructure.
8. How can banks control NPAs?
Banks can reduce NPAs through better credit assessment, regular monitoring, effective risk management, timely recovery and faster resolution of stressed assets.
Ravi Raaz
Hassan Khan
Shadab Ali