Digital Banking

Implications of Non-Performing Assets (NPAs) – A Detailed Overview

Non-Performing Assets

Non-performing assets (NPAs) are the bad loans of the financial institutions such as a bank, whose installment of principal amount and/or interest has remained due for a long time or for a confined period of time. NPAs are one of the major drawbacks of a prevailing banking system as it directly affects the profitability and liquidity of the bank and further poses threat on the survival of the bank. The banks and the government are taking further steps to prevent and control the rise of Non-Performing Assets.

Non-Performing assets are further classified as mentioned below:-

Classification of Non-Performing Assets

The Reserve Bank of India (RBI) further issued a Master Circular on Non-Performing Assets in the view to improve banking practices and to maintain greater transparency.

As per the master circular, a Non-Performing Assets (NPAs) is a loan or an advance where:-

  • Installment or interest of principal amount remains overdue for more than 90 days, in respect of term loan.
  • The status of the account remains “out of order” for a period longer than 90 days, in respect to cash credit/ overdraft.
  • The bills remain overdue for a period of more than 90 days in the matter of bills discounted and purchased.
  • Installment and interest of the principal amount overdue for more than two harvest seasons for a period not beyond two and half years in the matter relating to advance granted for agricultural purpose
  • Any amount to be received left overdue for a period longer than 90 days in respect of other accounts.


Reserve bank of India (RBI) has issued a set of guidelines for all the banks to reserve a certain amount for their bad loans or NPAs.

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The rules vary according to the different categories of NPAs that is mentioned below:

  • The allowance for the unpaid amount is to be made for 10 percent without creating any budget for securities or any government cover.
  • The substandard category would contribute another 10 percent making it a sum of 20% on an outstanding amount.
  • The requirement of doubtful and unsecured NPAs in 100 percent.

Types of Non-Performing Assets

Types of Non-Performing Assets
  • Sub-Standard Assets

The NPAs remained overdue for a time period of more than ninety days by not equal to 12 months.

  • Doubtful assets

The Non-Performing Assets which are overdue for a time period of not less than 12 months.

  • Loss Assets

The NPAs that has been recognized as a loss by the financial institution such as bank and such cannot be considered as non-recoverable by the bank. Such a non-performing asset would not be recoverable by an external auditor or internal audit also.

Factors contributing for rising in Non-Performing Assets

There can be a lot of factors as to why loans cannot be repaid. The situations may arise when a business fails to take off, unforeseen health emergency arises, or a job loss or death. Ultimately, all these factors contribute to developing NPAs. The banking system in India is facing this grave problem of NPAs particularly the public sector banks when compared to private banks & foreign banks. There are both internal and external factors leading to the growth of NPAs.

External Factors

External Factors

Internal Factors

Internal Factors

Prevention of Non-Performing Assets        

Public sector banks are the most affected because of NPAs. The rise of NPAs can pose a huge hazard to the county’s growth, hence prevention of the same has assumed to be a key role to fulfill. A robust risk management system help to deal with the lending decisions, preceded by a detailed risk analysis, that further results as a guide in taking important credit decision.

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The computerization of different branch activities and an effective management information system leads to effective risk measurement. It is important for the bank to build an effective database to analyze information relating to performance linking to loan defaults, operational and trading losses, etc, and rise up with the yardstick to make a plan for itself for future risk management. As per RBI[1] issued guidelines, the banking sector has tackle three types of risk i.e. operational risk, Market Risk, and Credit risk.

Prevention of Non-Performing Assets

Credit Risk

It is one of the most critical risks. In this type of risk, there is a possibility that a borrower will fail to meets its duty in accordance with the accepted terms. The efficient management of credit risk is required for a long term success on a bank.

Market Risk

Market Risk is defined as a risk due to changes in the market variables. There is a possibility of loss to banks in terms of earning and capital.

Operational Risk

This type of risk occurs due to many types of human or technical errors, legal barriers, internal processes, failure of the system, and people. All these factors lead to poor productivity and a huge impact on performance.


In conclusion, it can be said that taking sufficient measures including effective risk management and regularly technological advancement bank can reduce their Non-performing assets.  Furthermore, a collective measure required by the government and private bodies to effectively cut the NPAs. Also, a speedy redressal mechanism is required which has to be more efficient than the regular courts.

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