- A loan generally becomes an NPA when an instalment or interest is overdue for more than 90 days.
- Before that, banks track it as a special mention account in three stages.
- NPAs are classed as substandard, doubtful or loss depending on how long they have been bad.
- Secured lenders can use SARFAESI, and larger debts can go to the Debts Recovery Tribunal.
- Borrowers can negotiate a settlement or challenge a defective SARFAESI action.
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Non-performing assets in India: meaning and the 90-day rule
Under RBI's income recognition and asset classification norms, a term loan becomes an NPA if interest or an instalment remains overdue for more than 90 days. An overdraft or cash credit becomes an NPA if it stays out of order for 90 days. The rule applies to personal loans too.
SMA stages before an NPA
| Stage | Days overdue |
|---|---|
| SMA-0 | Up to 30 days |
| SMA-1 | 31 to 60 days |
| SMA-2 | 61 to 90 days |
| NPA | More than 90 days |
NPA classification by RBI
- Substandard: an NPA for up to twelve months.
- Doubtful: substandard for twelve months.
- Loss: identified as uncollectible, though not yet written off fully.
What happens after a loan becomes an NPA?
- Demand notice under Section 13(2) of the SARFAESI Act, giving 60 days to pay, for secured loans.
- Possession of the security under Section 13(4) if the dues are not paid.
- Sale of the security by auction.
- Recovery of the balance before the Debts Recovery Tribunal or a civil court.
See debt recovery for how lenders run this.
What can a borrower do?
- Reply to the Section 13(2) notice with objections; the bank must respond.
- Challenge measures under Section 17 before the DRT, within 45 days.
- Negotiate a one-time settlement under the bank's policy and RBI's framework for compromise settlements.
- Seek restructuring where the business is viable.
One time settlement NPA: what to know
An OTS is a negotiated payment, usually less than the full dues, that closes the account. Get the sanction letter in writing, pay within its timeline, and obtain a no-dues certificate and release of the security. The credit report will show the account as settled, which affects future borrowing.
What to do next
Borrowers should act on the first notice, not the last. Lenders should verify assets before suing. See asset verification.
Founder and Managing Partner, VIVS Legal. BLS, LL.B, LL.M, PGDBM, JAIIB.
