What Happens When a Loan Becomes NPA?
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2 Minute Summary
A loan becomes a Non-Performing Asset the moment payments are overdue for 90 days, triggering a set of RBI-mandated responses that reshape how the bank treats that account.
The 90-day rule is uniform across Indian banking, set by the RBI - once interest or principal on a loan stays unpaid for 90 days, the account is classified as an NPA regardless of the borrower's history or intent to eventually pay.
Once classified, the bank must set aside a provision - money reserved from its own profits - against the possibility that the loan is never recovered. Larger, older NPAs require larger provisions, directly hitting the bank's reported profit.
The bank shifts from a relationship-management posture to a recovery posture: dedicated recovery teams, formal notices, and eventually options like the SARFAESI Act allowing banks to seize and sell secured collateral without going through court for many loan types.
For large corporate NPAs, cases often move to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, a formal legal process to either restructure the company's debt or liquidate its assets to repay lenders.
Why It Matters
NPA levels are one of the clearest signals of a bank's health - rising NPAs erode profitability and can eventually threaten a bank's stability.
Who Benefits
Conservative lenders with strong underwriting standards face fewer NPAs and can lend more competitively as a result.
Who Is Impacted
Borrowers who default face aggressive recovery action and lasting credit score damage; bank shareholders absorb the provisioning hit to profits.
Key Takeaways
- ✓A loan is classified NPA after 90 days of overdue payments, per RBI rules.
- ✓Banks must set aside provisions against NPAs, which directly reduces reported profit.
- ✓Recovery options range from SARFAESI asset seizure to formal insolvency proceedings for large defaults.