Meaning of Non-Performing Assets
A Non-Performing Asset (NPA) is a loan or advance where interest or principal remains overdue for more than 90 days. Loans are assets for banks because they generate income through interest. When repayments stop, the asset ceases to earn income and becomes non-performing. Banks are required to regularly disclose NPA data to the regulator.
Classification of NPAs
As per regulatory norms, NPAs are classified into the following categories:
- Substandard Assets
Assets that have remained non-performing for a period of up to 12 months. - Doubtful Assets
Assets that have remained in the substandard category for more than 12 months. - Loss Assets
Assets identified as uncollectible, where recovery is highly unlikely, even if some residual value exists.
Provisioning for NPAs
Provisioning refers to the portion of a loan amount that banks set aside to cover potential losses.
- Standard provisioning ranges from 5–20% depending on sector and borrower risk
- Loss assets require 100% provisioning, in line with Basel norms
- Higher provisioning reduces bank profitability but strengthens balance sheets
GNPA and NNPA
Two indicators are used to assess the health of banks:
- Gross Non-Performing Assets (GNPA)
Total value of NPAs before adjusting for provisions. - Net Non-Performing Assets (NNPA)
GNPA minus provisions made by banks, reflecting the actual burden on banks.
NPAs are also expressed as ratios to total advances to assess asset quality.
Key Highlights of the NPA Crisis in India
Trend Overview
- Peak NPAs in 2018: ₹10.36 lakh crore
- Decline by March 2023 to ₹5.71 lakh crore, largely due to write-offs and insolvency proceedings
Concentration of Bad Loans
- Scheduled commercial banks recorded ₹9.33 lakh crore GNPA as of March 2019
- Top 100 defaulters accounted for nearly 50% of NPAs
- Manufacturing, energy, and construction sectors contributed over half of total bad loans
Major Corporate Defaulters
- Essar Steel, Videocon Industries, Reliance Communications
- Bhushan Power & Steel, Jaiprakash Associates
Sector-Wise Distribution of Large Defaulters
- Energy sector
- Manufacturing sector
- Construction and real estate
- Telecom
- Infrastructure-linked services
These sectors are capital-intensive and vulnerable to economic cycles and policy delays.
Impact on the Banking Sector
- Reduced Lending Capacity
Capital locked in bad loans limits fresh credit to productive sectors. - Pressure on Interest Rates
Banks may raise rates to protect profitability. - Lower Investment and Growth
Credit slowdown affects industrial expansion and employment. - Weak Recovery Prospects
Many large defaulters are under insolvency or liquidation, reducing recovery chances.
Institutional Responses
- Prompt Corrective Action Framework
Restricts bank operations when financial health deteriorates. - Insolvency and Bankruptcy Code (IBC)
Time-bound mechanism for resolution and recovery. - Corporate Debt Restructuring
Allows modification of loan terms to prevent default.
Conclusion
The NPA crisis reflects weak credit appraisal, poor governance, and concentrated corporate exposure. While recent reforms have improved recovery and reduced headline NPAs, long-term stability depends on stronger risk management, transparent disclosures, and accountability in large-ticket lending.
