Non-performing assets explained: Gross vs Net NPA, asset classification, recovery routes (SARFAESI, IBC, DRT, ARCs), provisioning and exam-ready facts.
WHAT HAPPENED
Asset quality is the health check of the banking system. When reports say NPA ratios have improved, it means a smaller share of loans is stuck. This note explains the terms and the recovery framework that exam questions are built on.
WHAT IS AN NPA
A loan or advance becomes a Non-Performing Asset when interest or principal remains overdue for more than 90 days. For agriculture loans the norm depends on crop seasons.
CLASSIFICATION OF ASSETS
- Standard asset: performing normally.
- Sub-standard asset: NPA for up to 12 months.
- Doubtful asset: remained sub-standard for 12 months or more. It is graded further by how long it has been doubtful.
- Loss asset: identified as uncollectable by the bank, auditors or the RBI, with little or no value left.
KEY RATIOS
- Gross NPA ratio = Gross NPAs divided by Gross Advances.
- Net NPA ratio = (Gross NPAs minus provisions) divided by (Gross Advances minus provisions).
- Provision Coverage Ratio (PCR) = provisions held against NPAs divided by Gross NPAs. A higher PCR means a safer cushion.
- Slippage ratio: fresh NPAs added during a period as a share of standard advances at the start.
- Credit cost: provisions charged to profit as a share of loans.
WHY RATIOS FALL
NPA ratios improve through recoveries and upgrades, write-offs of fully provisioned loans, sales of bad loans to asset reconstruction companies, and lower fresh slippages because of better underwriting. A write-off removes the loan from the books but does not waive the borrower's liability, and the bank can still pursue recovery.
RECOVERY FRAMEWORK
- SARFAESI Act, 2002: lets secured creditors seize and sell collateral without going to court.
- Insolvency and Bankruptcy Code (IBC), 2016: time-bound resolution through the National Company Law Tribunal (NCLT), with the Insolvency and Bankruptcy Board of India as regulator.
- Debt Recovery Tribunals (DRTs) set up under the RDDBFI Act, 1993.
- Lok Adalats for small-value cases.
- Asset Reconstruction Companies (ARCs) and the National Asset Reconstruction Company Ltd (NARCL), the so-called bad bank, which buys stressed assets.
- Capital standards: Basel III norms require banks to hold minimum capital against risk.
EXAM ANGLE
Revise the 90-day rule, the four asset classes, gross versus net NPA formulas, PCR, and which law or forum is used for which recovery route (SARFAESI for collateral, IBC for insolvency, DRT for debt recovery).
Published on 07 Nov 2025. Source: Pratiyogita Kosh editorial team. Figures quoted in news reports change over time, so confirm the latest numbers from the RBI, PIB or the relevant ministry before an exam.