## Non-Performing Assets (NPA)

### Core Definition

An asset becomes NPA when it ceases to generate income for the bank.

Specifically, an advance is NPA when:

Interest and/or principal installment remains overdue > 90 days (term loan)
The bill remains overdue > 90 days (bills purchased/discounted)

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### 'Out of Order' — For Cash Credit / Overdraft

A CC/OD account is 'out of order' (= NPA) if:

1. Outstanding balance continuously exceeds the sanctioned limit/drawing power; OR

2. Outstanding ≤ limit, but no credits for 90 days as on Balance Sheet date; OR

3. Credits exist but are insufficient to cover interest debited during the same period.

### 'Overdue' Defined

Any amount due under any credit facility not paid on the due date fixed by the bank.

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### Key Rules for NPA Classification

1. Record of Recovery — NPA classification is based on recovery record, NOT on security available or net worth of borrower/guarantor.

2. Borrower-wise, not Facility-wise — If one facility of a borrower becomes NPA, all facilities (including investments in securities) become NPA.

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### Accounts Regularized Near Balance Sheet Date

If a few credits appear just before year-end, the auditor must handle this carefully.
Where the account shows inherent weakness, treat as NPA despite the credit entries.
Auditor should check sample transactions immediately before and after year-end closing.
Check if transactions are reversed in first few days after year-end → indicator of window dressing to prevent NPA classification.

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### Special Cases

#### Government-Guaranteed Advances

Guarantee By	Classification for Provisioning	Classification for Income Recognition
Central Govt (not invoked/repudiated)	Standard Asset	NPA (treated as NPA for income recognition)
State Govt	NPA if overdue > 90 days	NPA if overdue > 90 days

#### Consortium Advances

Multiple banks jointly lend to one borrower.
Lead bank (highest share) coordinates.
If lead bank pools remittances but does not pass the share to other member banks → the account is treated as 'not serviced' in books of other members → becomes NPA for those banks.
Lead bank computes Drawing Power (DP) and allocates to members.

#### Erosion in Value of Security / Frauds

Condition	Classification
Realisable value of security < 50% of bank-assessed value	Directly classify as Doubtful
Realisable value < 10% of outstanding	Directly classify as Loss Asset (ignore security; write off or provide 100%)

#### Advances Against Term Deposits / NSCs / KVPs / LIC Policies

Need not be treated as NPA if adequate margin is available in the account.

#### Staff Loans

For housing loans where interest is payable after principal recovery: interest not 'overdue' from first quarter onwards.
Classified NPA only on default in principal installment or interest on respective due dates.
Staff advances by the bank-as-employer (not banker) → classified under 'Others' in Other Assets schedule (NOT advances).

#### Agricultural Advances

Crop Type	NPA Trigger
Short duration crops (crop season ≤ 1 year)	Overdue for 2 crop seasons
Long duration crops (crop season > 1 year)	Overdue for 1 crop season

Crop season = period up to harvesting, determined by State Level Bankers' Committee.
Natural calamities: Banks may reschedule; NPA classification governed by the rescheduled terms.

Worked example

### Example 1

Scenario — Window Dressing Detection: During audit of a bank, you notice that 5 borrowal accounts each received credits of ₹10–20 lakh in the last week of March, but these credits were reversed in the first week of April. What is the audit concern and how should you treat these accounts?

Answer: This is a classic 'window dressing' arrangement. Per prudential norms, NPA classification should be based on the record of recovery. The auditor should:

1. Check if accounts show inherent weakness (irregular drawings, declining turnover, LC devolvement, etc.).

2. Since credits are reversed post year-end, the account did not genuinely recover.

3. Treat the account as NPA despite the year-end credit.

4. Report the observation in the LFAR and consider whether it is susceptible to fraud/foul play requiring RBI reporting.

### Example 2

Scenario — Consortium NPA: Bank A and Bank B jointly lend to XYZ Ltd under a consortium (70:30). The borrower repays to Bank A (lead bank) but Bank A does not transfer Bank B's 30% share. How is the account treated in Bank B's books?

Answer: Since Bank A is not passing the remittance to Bank B, Bank B's account is treated as 'not serviced.' Therefore, the account becomes NPA in Bank B's books, even though the borrower is technically paying. Bank B must arrange to get its share transferred from Bank A.

### Example 3

Scenario — Agricultural NPA: A farmer takes a crop loan for wheat (short duration crop). He defaults on repayment for two consecutive crop seasons. When does his account become NPA?

Answer: For short duration crops, the account becomes NPA when the installment/interest is overdue for 2 crop seasons. Unlike term loans (90-day rule), agricultural advances follow the crop-season rule to align with harvest cycles.

⚠️ Common exam mistakes

Applying the 90-day rule mechanically to all advances — agricultural advances follow the crop-season rule (2 seasons for short-duration, 1 season for long-duration), not the 90-day rule.
Thinking NPA classification depends on the value of security — it depends solely on the record of recovery. Even a fully secured account is NPA if payments are overdue.
Forgetting the 'borrower-wise not facility-wise' rule — if one loan of a borrower becomes NPA, ALL facilities of that borrower (including investments in that entity's securities) become NPA.
Treating Central Government-guaranteed advances as NPA for provisioning — they are Standard for provisioning but NPA for income recognition purposes.
Confusing the 50% and 10% erosion thresholds: <50% of assessed value → Doubtful; <10% of outstanding → Loss Asset (ignore security entirely).
Classifying staff housing loans as NPA just because interest builds up — staff loans where interest is payable after principal recovery have a special rule and are NPA only on actual default on due dates.

Reference:

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Non-Performing Assets (NPA) — Definition, Rules, and Special Cases

Worked example

⚠️ Common exam mistakes