A bank classifies a loan account as a Non-Performing Asset (NPA) when the borrower fails to pay interest or principal for more than 90 days.
Understanding when and how a loan becomes an NPA is extremely crucial for borrowers, financial advisors, and legal professionals. The Reserve Bank of India (RBI) has issued clear and mandatory guidelines that govern NPA classification, and these rules apply uniformly to all banks and financial institutions in India. A borrower’s account moving into NPA status has serious consequences, including loss of credit score, legal recovery action, risk of asset repossession, and potential declaration as a wilful defaulter in extreme cases.
This article explains the meaning of NPA, the legal framework behind NPA classification, the 90-day norm, early warning signals, the impact of Special Mention Accounts (SMA), types of NPAs, judicial interpretations, borrower rights, and the long-term consequences of an NPA declaration.
Meaning of Non-Performing Asset (NPA)
A Non-Performing Asset is a loan or advance where the borrower has stopped paying the scheduled dues and the bank is unable to recover interest or principal within the prescribed time frame. The RBI defines an NPA as an asset where:
- Interest or instalment of principal remains overdue for a period of more than 90 days; or
- The account is classified as sub-standard, doubtful, or loss based on asset quality.
An NPA is therefore not merely a late payment but a complete breakdown of the repayment cycle extending beyond the banking tolerance period of 90 days.
RBI’s 90-Day Norm for NPA Classification
The core principle of NPA classification is the 90-day rule. As per RBI’s Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP), a loan account turns NPA after it remains overdue for more than 90 days.
This means:
- If an EMI is due on 1 January and remains unpaid up to 31 March, the account becomes NPA on 1 April.
- The clock runs day-to-day, not month-to-month.
- Banks cannot relax the rule; it is mandatory and uniform across all financial institutions.
The 90-day norm ensures that banks monitor account performance closely and take timely corrective actions.
Understanding “Overdue” and Its Link to NPA
The first stage of stress in a loan account is the point when the repayment becomes “overdue.” A loan becomes overdue the day after the EMI due date passes without payment. Overdue days run continuously until the EMI is paid.
The overdue period then determines the stress category classified as SMA (Special Mention Account), which eventually leads to an NPA classification when the overdue exceeds 90 days.
The Path from Overdue to NPA: SMA-0, SMA-1, SMA-2
Before a loan becomes an NPA, banks classify it into the following categories based on the number of overdue days:
SMA-0: Overdue up to 30 days
- First sign of stress.
- Banks send reminders and alerts via SMS, email, and phone calls.
SMA-1: Overdue between 31–60 days
- Banks start closer monitoring.
- Collection agents may be assigned.
SMA-2: Overdue between 61–90 days
- High risk of default.
- Banks begin initiating pre-NPA recovery steps.
- Borrowers receive formal notices and warnings.
Once the overdue crosses 90 days, the account is mandatorily classified as NPA.
The SMA mechanism acts as an early warning system and ensures borrowers get sufficient alerts before their account slips into NPA.
When Exactly Does the NPA Tag Come Into Effect?
NPA classification takes place immediately on the 91st day of continuous overdue.
Example:
- EMI due date: 1 January
- Overdue begins: 2 January
- 30 days complete: SMA-0
- 60 days complete: SMA-1
- 90 days complete: SMA-2
- 91st day: Account becomes NPA
The system-based automation ensures that banks cannot delay or manipulate the dates.
Types of NPAs Under Indian Banking Law
Once classified as NPA, the loan account is further divided into three asset categories depending on the duration of default:
1. Sub-Standard Asset
- NPA for up to 12 months.
- Bank’s recovery chances still considered fair but reduced.
2. Doubtful Asset
- NPA for more than 12 months.
- High risk of recovery failure.
- Requires high provisioning from the bank.
3. Loss Asset
- Bank or auditor considers the loan irrecoverable.
- Bank writes it off or provides almost 100% provisioning.
These categories reflect the deterioration of asset quality over time.
Legal Consequences After NPA Classification
NPA classification empowers banks to initiate various legal recovery mechanisms. These include:
1. SARFAESI Act, 2002
- Applicable to secured loans.
- Bank issues a 60-day demand notice under Section 13(2).
- If unpaid, bank can take possession of property, assets, vehicles, or business equipment.
2. Recovery Suit in Civil Courts or DRT
- For unsecured loans.
- DRT cases are filed for recovery amounts above Rs. 20 lakhs.
3. Initiation of Insolvency Under IBC
- In commercial loan defaults.
- Banks may file under Section 7 of IBC for corporate borrowers.
4. Reporting to Credit Bureaus
- NPA status severely reduces credit score.
- Impacts the borrower’s ability to take future loans.
5. Freeze or Restrictions on Bank Accounts
- In some high-risk cases, banks may restrict further withdrawals or facilities.
Consequences on the Borrower’s Financial Life
Once a loan is declared NPA, the borrower faces severe consequences:
1. Sharp Drop in CIBIL Score
- Usually drops by 100–200 points.
- Future loans become extremely difficult.
2. No Further Credit Facilities
- Banks block top-ups, renewals, or enhancements.
3. Risk of Property or Asset Seizure
- In secured loans, SARFAESI action may result in auction.
4. Legal Notices and Court Cases
- Recovery suits and enforcement proceedings may begin.
5. Impact on Co-Borrowers and Guarantors
- Liability spreads, causing credit score damage to all linked persons.
RBI and Court View on Borrower Rights During NPA Proceedings
Indian courts have repeatedly emphasized that borrowers are entitled to fair process. Key judicial points include:
- Borrowers must receive a 60-day notice before the bank takes action under SARFAESI.
- They have the right to file objections to the bank’s demand notice.
- Banks must respond with reasons before continuing.
- Borrowers may approach DRT to challenge illegal possession attempts.
- If the bank does not follow mandatory guidelines, courts can set aside the action.
However, courts do not interfere with NPA classification itself unless guidelines are violated.
Can NPA Classification Be Reversed?
Yes, but only when the borrower regularizes the account by paying the overdue amount along with interest or restructuring the loan officially.
The account becomes “standard” only after the overdue is fully cleared and fresh repayment discipline is maintained.
How Borrowers Can Avoid NPA Status
1. Pay minimum overdue amount within 90 days
Even partial clearance may prevent slipping into NPA.
2. Seek restructuring
Borrowers facing genuine financial difficulty may request:
- Tenure extension
- EMI reduction
- Moratorium
- Conversion of overdue into a funded interest term loan (FITL)
3. Use pre-NPA settlement options
Banks offer:
- One-Time Settlement (OTS)
- Compromise settlement
- Payment plans
4. Communicate with the bank proactively
Silence is treated as unwillingness to pay.
Frequently Asked Questions (FAQs)
Q1. Is the NPA classification the same for all types of loans?
Yes, the 90-day norm applies to all term loans, home loans, personal loans, credit card dues, SME loans, and business loans.
Q2. Can banks classify an account as NPA even without SMA stages?
Yes, SMA classification is an early warning tool, not a legal requirement. NPA classification depends only on the 90-day rule.
Q3. Do weekends and holidays pause overdue counting?
No, overdue days run continuously without interruption.
Q4. Can paying just one EMI remove NPA status?
No. Borrowers must clear all overdue interest and principal.
Q5. Can a bank classify an account as NPA if the borrower is in dispute?
Yes, disputes do not stop NPA classification. Only payment matters.
Conclusion
A loan becomes a Non-Performing Asset when the borrower fails to pay the EMI or interest for more than 90 days. This simple but strict rule laid down by the Reserve Bank of India forms the backbone of India’s banking and recovery system. Once an account turns NPA, the consequences are serious, including legal recovery actions, property seizure in secured loans, and long-lasting damage to creditworthiness. Borrowers must stay alert to early warning signs such as SMA classification and communicate actively with the bank to avoid slipping into NPA. Understanding the NPA framework not only helps borrowers remain compliant but also ensures they make informed financial decisions and protect their long-term financial health.
Disclaimer: This information is intended for general guidance only and does not constitute legal advice. Please consult with a qualified lawyer for personalized advice specific to your situation.
Advocate J.S. Rohilla (Civil & Criminal Lawyer in Indore)
Contact: 88271 22304