## NPA Classification: Out of Order Accounts and Asset Categories
### What is a Non-Performing Asset (NPA)?
Under RBI prudential norms, a loan or advance is classified as an NPA when it ceases to generate income for the bank. For Overdraft (OD) / Cash Credit (CC) accounts, the NPA trigger is the account becoming "out of order."
### When is an OD/CC Account 'Out of Order'?
An account must be treated as out of order if ANY of the following conditions is met:
| Condition | Description |
|---|
| Excess | Outstanding balance is continuously in excess of the sanctioned limit or drawing power |
| No Credits (90 days) | Outstanding balance is within the limit/DP, but there have been no credits continuously for 90 days as on the balance sheet date |
| Insufficient Credits | Credits exist, but they are insufficient to cover even the interest debited during the same period |
> Remember the 90-day rule: Even if the borrower has not exceeded the limit, the absence of any inflow for 90 days makes the account out of order and therefore NPA.
### NPA Sub-Categories (Asset Classification)
| Category | Condition |
|---|
| Sub-Standard Asset | Remained NPA for ≤ 12 months |
| Doubtful Asset – D1 | NPA for > 12 months but ≤ 24 months (secured; 25% provision on secured portion + 100% on unsecured) |
| Doubtful Asset – D2 | NPA for > 24 months but ≤ 36 months |
| Doubtful Asset – D3 | NPA for > 36 months |
| Loss Asset | Identified as uncollectible; 100% provision required |
### Provisioning Rates for Doubtful Assets (D1)
- Secured portion: 25% provision
- Unsecured portion: 100% provision
The split between secured and unsecured is based on the realisable value of security held.
### Example 1
Scenario (Q3): K Ltd. — Is the Cash Credit Account 'Out of Order'?
Facts: K Ltd. has a CC limit of ₹25 crores. Drawing power ranged ₹22–25 crores. Actual outstanding remained below ₹20 crores all year. No credits to the account in the last two quarters (i.e., ~180 days).
Analysis: The outstanding (₹20 crores) is less than the sanctioned limit/DP — so the first condition (excess) is not triggered. However, there have been no credits continuously for more than 90 days as on the balance sheet date. This squarely meets Condition 2.
Conclusion: The account is 'out of order' and therefore an NPA.
### Example 2
Scenario (Q4): Sun Industries — Asset Sub-Category as at 31 March 2024
Facts: National Bank advanced CC of ₹25L to Sun Industries. Account was 'Standard' as on 31.12.2023. From the CBS extract, no credits were received from December 2023 through March 2024 (no credits for >90 days as on 31.03.2024). Drawing power consistently ₹25L; outstanding balance < DP.
Analysis: Outstanding < DP, but no credits for 90 days → account is 'out of order' → NPA. Since the account has been NPA for ≤ 12 months (it was standard on 31.12.2023), it is classified as a Sub-Standard Asset as on 31.03.2024.
### Example 3
Scenario (Q10): Provision Calculation for Doubtful Asset (D1)
Facts: KRT Enterprises — term loan classified as D1. Outstanding: ₹50L. Security value: ₹40L. Branch provided ₹7.5L.
Calculation:
- Secured portion = ₹40L → Provision @ 25% = ₹10L
- Unsecured portion = ₹50L − ₹40L = ₹10L → Provision @ 100% = ₹10L
- Required provision = ₹20L
Conclusion: Branch provision of ₹7.5L is insufficient. The auditor should flag the shortfall of ₹12.5L.