Non-Performing Assets

A non-performing asset (NPA) is a bank loan or advance whose repayment or servicing has remained irregular beyond RBI’s prescribed period. Under RBI’s income-recognition and asset-classification framework, the applicable test depends on whether the advance is a term loan, an overdraft or cash-credit account, a bill, or a qualifying agricultural loan.

The ordinary overdue test

For a term loan, the advance becomes an NPA when interest or an instalment of principal remains overdue for more than 90 days. An amount is overdue when it is not paid on the due date fixed by the bank.

• For bills purchased and discounted, the NPA trigger is that the bill remains overdue for more than 90 days.
• The availability of collateral does not, by itself, prevent an advance from becoming an NPA.

Overdraft and cash-credit accounts

An overdraft or cash-credit advance becomes an NPA when the account remains out of order. RBI treats an account as out of order if any of the following conditions applies:

• The outstanding balance remains continuously above the sanctioned limit or drawing power for 90 days.
• Even where the outstanding balance is within the sanctioned limit or drawing power, there are no credits continuously for 90 days.
• Even where the outstanding balance is within the sanctioned limit or drawing power, credits are insufficient to cover the interest debited during the previous 90 days.

Crop-season tests for agricultural advances

For agricultural advances covered by RBI’s crop-season norms, classification follows the crop cycle rather than the ordinary 90-day overdue test.

• For short-duration crops, the advance becomes an NPA when interest or an instalment of principal remains overdue for two crop seasons.
• For long-duration crops, the corresponding period is one crop season.
• Long-duration crops have a crop season longer than one year; the State Level Bankers’ Committee determines the crop season for each crop in the state.

Consequence for income recognition

Once an advance becomes an NPA, interest income is recognised on actual realisation, not merely because it has accrued. Interest previously accrued and credited to income but remaining unrealised must be reversed.