Non-Performing Asset (NPA): Do you know about Non-Performing Asset (NPA)? What are the different types of NPA? What is the Period of NPA? If you know then just go this post for a quick revision. If you don’t then read this post thoroughly.
Before understanding NPA, you must first know what is an asset for a bank and what is a liability for a bank.
What is Asset and Liability of a Bank
Assets of a Bank: In simple language, assets are those portion of banks capital that belongs to the bank and which the customer is liable to pay to the bank. For example, a bank gives a loan to a customer. That money (loan money) was of the bank. The customer is liable to pay the loan amount back to the bank. So this money that belongs to the bank which is with the customer is an asset of the bank.
Liability of a bank: Liability is that portion of the banks capital that it needs to pay to the customer as it belongs to the customer. Like the amounts deposited in Savings and Current Accounts of the customer.
What is Non-Performing Asset
An asset becomes non performing when it stops generating income for the bank.
Example: When a bank gives a loan to its customer, in return the customer pays interest on the loan to the bank. This interest is the income for the bank in case of loans. If the customer stops paying this interest, the income from this asset (Loan) stops. Hence it becomes non-performing for the bank. But there must be some number of days after which the bank must consider any asset to be NPA. The same is given below:
A non-performing asset (NPA) is a loan or an advance where;
Term Loans- Interest/instalment of principal amount remain overdue for a period of more than 90 days.
Overdraft/Cash Credit (OD/CC)- The account remains ‘out of order’ for more than 90 days.
Bills purchased and discounted- the bill remains overdue for a period of more than 90 days.
For short duration crops- the instalment of principal or interest thereon remains overdue for two crop seasons.
For long duration crops- the instalment of principal or interest thereon remains overdue for one crop season.
What is Out of Order Status-
This comes into the picture in case of Overdraft/Cash Credit. An account should be treated as ‘out of order’ if the outstanding balance (the overdraft made by the customer) remains continuously in excess of the sanctioned limit/drawing power (The maximum overdraft that he can make) for 90 days.
Note: In case of interest payments, banks should classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.
Early identification of NPA
Now, you must be aware that a loan account is classified as NPA when the interest repayment is not done for 90 days. But even before 90 days, a bank can further categorise the loan under three sub-category under the Special Mention Account (SMA) which would indicate the probability of the loan becoming an NPA.
Before a loan account turns into an NPA, banks are required to identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the table below:
| SMA Sub Category | Basis of Classification |
| SMA-0 | 1-30 days. Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress |
| SMA-2 | 31-60 days. Principal or interest payment overdue between 31-60 days |
| SMA-2 | 61-90 days. Principal or interest payment overdue between 61-90 days |
Categories/Types of NPAs
Banks are required to classify non-performing assets further, based on the period for which the asset has remained non performing. The three types of NPA are:
- Substandard Assets
- Doubtful Assets
- Loss Assets
Substandard Assets (<12 months)
A substandard asset is one, which has remained NPA for a period less than or equal to 12 months.
Doubtful Assets
An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. It may remain doubtful Asset for a period of 3 years.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.
Standard Assets
Standard Assets are those which do not disclose any problem to the bank or do not carry any risk for the bank.
Period of Classification of NPA – With Example
Suppose a term loan was disbursed on April 01, 2019 and the first due date was say August 01, 2019. But the customer did not pay. The timeline for the classification of the asset is given below:
| Classification | Start | Ends |
| Standard | April 01, 2019 | August 01, 2019 |
| SMA-0 | August 02, 2019 | August 31, 2019 |
| SMA-1 | September 01, 2019 | September 30, 2019 |
| SMA-2 | October 01, 2019 | October 30, 2019 |
| Sub-Standard | October 31, 2019 | October 30, 2019 |
| Doubtful | October 31, 2019 | October 30, 2022 |
Great content, but i didn’t understand the example, something is wrong i guess