# Non-Performing Assets (NPA) — Definition and Key Rules

## What Makes an Advance an NPA?

A loan or advance is classified as Non-Performing when:

1. Term Loan — Interest and/or principal instalment remains overdue > 90 days.

2. Overdraft / Cash Credit (OD/CC) — The account remains Out of Order (OOO).

An account is OOO if the outstanding balance exceeds the sanctioned limit/drawing power continuously for 90 days, OR if no credits are present for 90 days, OR credits are insufficient to cover interest debited.

3. Bills Purchased & Discounted — Bill remains overdue for more than 90 days.

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## Income Recognition on NPAs

Income from NPA is not recognised on accrual basis.
It is booked as income only when actually received (cash basis).
This is a critical departure from the normal accrual policy applied to standard accounts.

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## Borrower-Wise (Not Facility-Wise) Classification

Asset classification is done borrower-wise.
If any one facility of a borrower becomes NPA, all facilities (including investments in securities of that borrower) are classified as NPA.
You cannot keep one loan of a borrower as Standard while another is NPA.

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## Record of Recovery — The Deciding Factor

Classification as NPA is based on the record of recovery (actual payment history).
Availability of security or net worth of the borrower/guarantor is NOT to be taken into account when deciding NPA status.
A fully secured loan overdue for 91 days is still an NPA.

Worked example

### Example 1

Example 1 — Term Loan: A borrower's EMI of ₹1 lakh was due on 1 October. No payment is received. By 31 December (91 days), the account must be classified as NPA — Substandard, regardless of the collateral backing.

### Example 2

Example 2 — Cash Credit (OOO): ABC Ltd has a CC limit of ₹50 lakhs. The outstanding balance has been ₹52 lakhs continuously for 95 days with no fresh credits. The account is OOO and must be classified NPA.

### Example 3

Example 3 — Borrower-wise rule: XYZ Ltd has a term loan (overdue 100 days → NPA) and a separate working capital loan (regular). The auditor must classify the working capital loan also as NPA because classification follows the borrower, not the individual facility.

### Example 4

Example 4 — Income recognition: A bank earned ₹2 lakhs interest on an NPA account in FY 2024-25 but received only ₹80,000 in cash. Only ₹80,000 is recognised as income; the remaining ₹1.2 lakhs cannot be accrued.

⚠️ Common exam mistakes

Accruing interest income on NPA accounts — income must only be recognised when cash is received.
Classifying loans facility-wise instead of borrower-wise — all facilities of a defaulting borrower become NPA.
Using collateral value to justify keeping an overdue loan as 'Standard' — security is irrelevant for NPA classification.
Applying the 90-day rule incorrectly to OD/CC — for CC/OD, the test is 'Out of Order' status, not simply days overdue.
Forgetting that bills purchased and discounted also follow the 90-day overdue rule.

Bare-Act text Definition of NPA · RBI Prudential Norms on Income Recognition, Asset Classification and Provisioning (IRACP) · click to expand

Non-performing asset is a loan/advance where interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan; the account remains out of order in respect of an OD/CC; the bills remain overdue for a period of more than 90 days in the case of bills purchased and discounted.

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Non-Performing Assets — Definition and Classification Rules

Worked example

⚠️ Common exam mistakes