Banking Awareness- Basics of NPA

Banking Awareness- Basics of NPA 

NPA (Non –Performing Asset)

When a person does not repay the loan after 90 days then it is known as NPA.

The asset account of the borrower –which has been classified by banks,

1. Standard –Regulatory

2. Sub Standard- 3 months-12 months

3. Doubtful -12 months-36 months

4. Loss Assets > 36 months



NPA: Interest/Installment of Principle remain overdue for > 90 days

Overdraft/Cash Credit –Amount remains out of order > 90 days

Bill Discounting – bill remains overdue > 90 days

For Farmers- > 2 Harvest Season









SARFAESI ACT -2002


Securitization and Restructuring of Financial Assets and Enforcement of Security Interest Act 2002

It allows banks to take possession, lease to sale these securities.

Bank gives notice of Possession to à Customer

60 Days

15 Days 45 Days

(Customer talks to bank) Customer approaches DRT for taking stay

Mutual Understanding Debt Recovery Appellate Tribunal



Ø DRT (Debt Recovery Tribunal)

Ø DRAT (Debt Recovery Appellate Tribunal) -50% Amount Deposit

Ø Loans < 1 lakh (not eligible under SARFAESI)

Ø Agriculture Lands cannot be sold

Ø The amount due is less than 20% of Principle and Interest



On a bank’s balance sheet, loans made to customers are listed as assets. The biggest risk to a bank is when customers who take out loans stop making their payments, causing the value of the loan assets to decline.

NPA is any asset of a bank which is not producing any income.
Term Loan: It means once the borrower has failed to make interest or principal payments for 90 days, the loan is considered to be a non-performing asset.
Overdraft/Cash Credit: Overdraft remains continuously in excess of the sanctioned amount.

According to RBI, terms loans on which interest or installment of principal remains overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.

However, in terms of Agriculture / Farm Loans; the NPA is defined as under For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment/interest) is not paid for 2 crop seasons, it would be termed as an NPA.


Types of NPA:

Sub-standard: If the borrower does not pay dues for 90 days after the end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard.

Doubtful: If sub-standard asset remains so for a period of 12 more months; it is “Doubtful asset”.

Loss Assets: If the loan is not repaid even after it remains a sub-standard asset for more than 3 years than it is Lost Assets.

SARFAESI Act -2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act have provisions for the banks to take legal recourse to recover their dues.

When a borrower makes any default in repayment and his account is classified as NPA; the bank has to issue notice to the borrower giving him 60 days to pay his dues.

If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SARFAESI Act

Bank can use this for their own purpose like opening a new branch on it, installing of ATM’s etc.

Reselling of NPA:

If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).

They purchase such loans on low amounts and try to recover as much as possible from the defaulters.

Their revenue is the difference between the purchased amount and recovered the amount.



Government of India has constituted 33 Debt Recovery Tribunals and 5 Debt Recovery Appellate Tribunal across the country.

Debt Recovery Tribunals:

Narasimhan Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established.

Debts Recovery Appellate Tribunal (DRAT)

DRAT is the appellate authority to hear and dispose of appeals arising out of the decisions of the DRTs. A person qualified to be a judge of the High Court or who has been a Member of the Indian Legal Service and his held a post in Grade-I of the service for at least three years or who has held the post of Presiding Officer of DRT for a minimum period of three years can be appointed as the Chairperson of DRAT.