NPA Basics: Classification, SMA, Provisioning and Write-Off
NPA is one of the most important concepts in banking awareness. Instead of memorising only the phrase “90 days”, understand the journey of a stressed loan from overdue status to NPA classification and the consequences for a bank.
Overdue → Warning stage → NPA → Asset classification → Provisioning
What Is an NPA?
NPA stands for Non-Performing Asset.
In simple terms, a loan or advance becomes non-performing when it stops generating income for the bank according to RBI’s applicable income-recognition and asset-classification norms.
NPA classification is governed by regulatory rules. It is not simply a label a bank gives to any borrower experiencing temporary financial difficulty.
The 90-Day Concept
For many term loans, an account is classified as NPA when interest and/or an instalment of principal remains overdue for a period of more than 90 days, subject to the applicable RBI norms.
Term loan → More than 90 days overdue → Think NPA
However, not every credit facility is tested in exactly the same way. Cash-credit and overdraft accounts, agricultural advances and some other facilities have specific regulatory criteria.
“90 days” is an important rule, but do not assume that every type of advance is classified using one identical overdue test.
What Does Overdue Mean?
An amount is overdue when it is not paid on the due date fixed by the bank under the applicable credit arrangement.
An overdue account does not automatically become an NPA on the first day after the payment due date.
Simple Loan Stress Journey
What Is SMA?
SMA stands for Special Mention Account.
The SMA framework helps identify signs of stress before an account moves into NPA classification.
SMA = Stress warning before NPA
SMA-0, SMA-1 and SMA-2
For applicable loan accounts, the familiar overdue buckets are:
SMA-0
Principal or interest payment, or any other amount, is wholly or partly overdue for up to 30 days.
SMA-1
Overdue for more than 30 days and up to 60 days.
SMA-2
Overdue for more than 60 days and up to 90 days.
NPA
For a typical term-loan example, the account moves into NPA territory when the applicable more-than-90-days criterion is met.
0–30 → SMA-0
31–60 → SMA-1
61–90 → SMA-2
Beyond applicable 90-day threshold → NPA
Why Is Early Identification Important?
The earlier financial stress is recognised, the more time the lender and borrower may have to understand the problem and take appropriate action within the regulatory and contractual framework.
SMA classification therefore acts as an early-warning structure rather than simply another name for NPA.
Asset Classification After NPA
Once an asset is classified as non-performing, further classification depends on factors such as how long it has remained non-performing and the applicable RBI norms.
Remember the Progression
Performing account
Standard Asset
A standard asset is a performing asset that does not carry the problems associated with NPA classification under the applicable norms.
Standard = Performing
Substandard Asset
An NPA is classified as substandard for the period prescribed under RBI’s asset-classification norms.
Under the commonly tested framework, an asset that has remained NPA for a period less than or equal to 12 months is classified as substandard.
First NPA stage → Substandard
Doubtful Asset
An asset becomes doubtful when it has remained in the substandard category for the period specified under the applicable norms.
Longer NPA duration → Doubtful
Loss Asset
A loss asset is one where loss has been identified by the bank, internal or external auditors, or RBI inspection, as applicable, but the amount has not been fully written off.
Loss asset does not simply mean “the borrower has missed one instalment.” It is a specific asset-classification category.
What Is Provisioning?
Provisioning means recognising an amount in the bank’s accounts to provide for expected or identified credit risk in accordance with applicable prudential norms.
Different asset categories can attract different provisioning requirements.
Higher credit deterioration → Greater need to recognise potential losses.
Provision Is Not the Same as Cash Kept in a Box
Students sometimes imagine provisioning as physically placing money aside in a separate locker.
It is primarily an accounting and prudential recognition of potential loss or credit deterioration according to applicable rules.
Provisioning vs Write-Off
Provisioning
Recognises expected or identified credit losses in the accounts according to applicable norms.
Write-Off
Removes the relevant loan amount from the bank’s balance-sheet asset position according to accounting and regulatory treatment.
A write-off does not automatically mean that the borrower has been legally forgiven the debt.
What Is a Technical Write-Off?
A technical write-off generally refers to a situation where an NPA is written off at the head-office level for accounting purposes while the borrower-level account can continue to remain subject to recovery efforts.
Write-off ≠ Automatic waiver
Loan Waiver vs Write-Off
Write-Off
An accounting treatment by the lender. Recovery rights may continue subject to the applicable circumstances.
Waiver
Involves giving up the claim to repayment to the extent covered by the waiver according to its legal terms.
Write-off and loan waiver are not synonyms.
What Is GNPA?
GNPA stands for Gross Non-Performing Assets.
It represents the gross amount of loans and advances classified as NPAs before adjusting for the relevant provisions and other specified items used in arriving at net NPA.
What Is NNPA?
NNPA stands for Net Non-Performing Assets.
It reflects NPAs after the adjustments prescribed for calculating net NPA.
Gross → Before relevant adjustments
Net → After relevant adjustments
GNPA Ratio
The Gross NPA ratio broadly compares gross NPAs with gross advances.
Gross NPA Ratio = Gross NPAs ÷ Gross Advances × 100
Example
Suppose a bank has:
Gross advances = ₹10,000 crore
Gross NPAs = ₹500 crore
= 5%
This is only a mathematical illustration.
Does a Higher NPA Ratio Automatically Mean a Bank Will Fail?
No single ratio should be used in isolation to reach that conclusion.
Analysts may also consider capital, profitability, provisioning, recoveries, asset mix, liquidity and many other indicators.
One banking ratio rarely tells the whole story.
What Is Restructuring?
Restructuring broadly involves changing the terms of a credit facility because of the borrower’s financial position or other circumstances covered by the applicable framework.
Possible changes can involve repayment schedules, tenure or other terms, depending on the permitted restructuring arrangement.
Restructuring does not automatically erase the loan or remove credit risk. Its regulatory treatment depends on the applicable rules.
What Is Recovery?
Recovery refers to steps taken by a lender to collect amounts due from borrowers.
The appropriate process depends on the type of loan, security, borrower, amount involved and applicable legal framework.
NPA Does Not Mean Fraud
A loan can become non-performing for many reasons, including business failure, cash-flow problems, economic conditions or other financial stress.
Fraud is a separate legal and regulatory concept.
NPA ≠ automatically fraud
Default ≠ automatically wilful default
What Is Wilful Default?
Wilful-default classification is governed by specific RBI directions and procedural requirements.
It should not be applied merely because a loan has become overdue or NPA.
NPA describes asset performance.
Wilful default involves additional prescribed criteria.
Why NPAs Matter
Income
Non-performing loans affect recognition of interest income.
Profitability
Provisioning and credit losses can affect bank profits.
Capital
Large credit losses can ultimately affect a bank’s capital position.
Lending Capacity
Asset quality forms part of the broader factors affecting a bank’s ability and willingness to extend credit.
Common Exam Traps
Incorrect.
Incorrect. SMA is an early stress classification.
Incorrect.
Incorrect.
Incorrect.
Incorrect.
Test Yourself
1. What does NPA stand for?
2. What does SMA stand for?
3. Which SMA bucket broadly covers more than 60 and up to 90 days overdue?
4. What normally follows the standard category when an asset becomes NPA?
5. What comes after substandard classification?
6. Does a write-off automatically waive the borrower’s debt?
7. What does GNPA stand for?
8. What does NNPA stand for?
9. Is every NPA a fraud account?
10. What is the easiest NPA classification sequence to remember?
60-Second Revision
SMA → Early indication of stress
SMA-0 → Up to 30 days overdue
SMA-1 → More than 30 and up to 60 days
SMA-2 → More than 60 and up to 90 days
Typical term-loan NPA cue → More than 90 days overdue
Classification → Standard → Substandard → Doubtful → Loss
Provision → Recognition of potential credit loss
Write-off → Accounting treatment
Waiver → Giving up repayment claim according to waiver terms
GNPA → Gross NPA
NNPA → Net NPA