Management of Non-Performing Assets (NPAs): formula sheet

Key formulas

NPA test for a term loan

Interest or instalment overdue for more than 90 days ⇒ NPA

Count days from the due date. Overdue for exactly 90 days is not yet an NPA; it must exceed 90 days.

Sub-standard asset

NPA for a period up to 12 months ⇒ Sub-standard

Starts the day the account is classified as NPA.

Doubtful asset

Sub-standard for 12 months ⇒ Doubtful

Further sub-divided by how long it has been doubtful, which matters for provisioning rates.

Loss asset

Loss identified, not fully written off ⇒ Loss

Identified by the bank, internal or external auditors or RBI inspection.

Income recognition on NPA

Interest on NPA = recognised only when actually received

Interest accrued but unrealised is not taken to income; earlier accrued interest is reversed as per RBI norms.

Overall flow

Standard → Sub-standard → Doubtful → Loss

Downgrade is by time in NPA and by deterioration of security.

Standard asset provision

General provision = rate × outstanding standard advances

The rate is 0.40% for most advances. Some sectors have different rates, such as lower for direct agriculture and SMEs and higher for commercial real estate. Use the rate given in the question.

Sub-standard asset provision

15% × secured portion + 25% × unsecured portion

Rates are those usually applied under RBI norms. Some infrastructure loans have a different rate. Unsecured means the part not covered by realisable value of security.

Doubtful asset provision

Secured portion: 25% (up to 1 year), 40% (1 to 3 years), 100% (over 3 years). Unsecured portion: 100%

The period is the time the asset has stayed in the doubtful category, not the age of the loan.

Loss asset provision

100% of outstanding

The asset may also be written off.

Secured and unsecured split

Secured portion = realisable value of security (up to outstanding); Unsecured portion = outstanding − secured portion

Do this split before applying any rate.

Gross NPA ratio

Gross NPA ÷ Gross advances × 100

Uses advances before deducting provisions.

Net NPA and Net NPA ratio

Net NPA = Gross NPA − provisions held; Net NPA ratio = Net NPA ÷ (Gross advances − provisions) × 100

Textbook questions deduct NPA provisions from both numerator and denominator. Follow any definition the question gives.

Provision coverage ratio

Provisions held against NPAs ÷ Gross NPA × 100

A higher ratio means a stronger cushion.

SMA-0

Overdue 1 to 30 days

Principal or interest unpaid for up to 30 days. Asset is still standard.

SMA-1

Overdue 31 to 60 days

Stress is visible. Bank should start corrective action.

SMA-2

Overdue 61 to 90 days

Last stage before NPA. Resolution should be urgent.

NPA trigger

Overdue more than 90 days → NPA

The 90-day rule is the dividing line between SMA and NPA for term loans.

Days past due count

Days past due = Today's date − Due date of the unpaid amount

Count from the due date. Clear the full overdue amount to reset.

Section 9 SARFAESI: ARC measures

Management change or takeover | sale or lease of business | rescheduling of debts | enforcement of security interest | settlement of dues | possession of secured assets | conversion of debt into shares

The seven measures an ARC may provide for asset reconstruction. Under Section 9(3) the ARC acts in accordance with RBI policies and directions.

Section 10(1) SARFAESI: other functions of an ARC

Agent for recovery of dues | manager under Section 13(4)(c) | receiver if appointed by a court or tribunal

Fees for agency and manager roles are mutually agreed. An ARC cannot act as manager if this gives rise to any pecuniary liability.

Section 10(2) SARFAESI: business restriction

No business other than securitisation or asset reconstruction without prior RBI approval

Applies to an ARC with a certificate of registration, save for the functions in Section 10(1). The Explanation says ARC does not include its subsidiary.

OTS recovery comparison

Recovery % = OTS amount ÷ Total dues × 100

Use it to compare an OTS offer with expected recovery from enforcement, after costs and time.

Net write-off loss

Loss to profit and loss = Amount written off − Provision already held

If provision already covers the loan, the write-off has no further profit impact. Write-off does not extinguish the borrower's liability.

CoC approval threshold (Section 30(4))

Approval needs votes ≥ 66% of the voting share of the financial creditors

Earlier it was 75%; the amended text says sixty-six per cent. Only financial creditors vote.

RP's duty on each plan (Section 30(2))

Plan must cover: CIRP costs, operational creditors, dissenting financial creditors, management, implementation, legality, Board requirements

The RP confirms this before presenting the plan to the CoC (Section 30(3)).

Minimum payment to operational creditors (Section 30(2)(b))

Payment ≥ higher of (i) amount they would get in liquidation under Section 53, or (ii) amount they would get if the plan's total distribution were made in the Section 53(1) order of priority

Compute both measures. The higher one is the floor. The plan's offer must be at least that floor.

Minimum payment to dissenting financial creditors

Payment ≥ amount they would get under Section 53(1) in liquidation

Applies to financial creditors who do not vote in favour of the plan. Distribution must be fair and equitable.

Priority of CIRP costs

CIRP costs are paid in priority to other debts of the corporate debtor

Section 30(2)(a).

Resolution applicant's vote (Section 30(5))

May attend the CoC meeting; no vote unless also a financial creditor

Prevents a conflict of interest in voting on its own plan.

Quick revision

• An NPA is classified by the bank under RBI norms. Recall the exact categories and definitions from your study material.
• Special mention stages come before NPA status and are meant for early action.
• Provisioning reduces profit, so higher NPAs weaken profitability and capital.
• CIRP under Section 10 begins from the date the Adjudicating Authority admits the application.
• Under Section 10, the Adjudicating Authority decides within 14 days: admit if complete, reject if incomplete.
• Before rejecting an incomplete application, the applicant gets notice to fix defects within 7 days.
• A Section 10 application must include a special resolution of shareholders, or approval by at least three-fourths of partners.
• Section 29A bars a person, or anyone acting jointly or in concert with them, from submitting a resolution plan.
• Section 29A(a) to (j) covers undischarged insolvents, wilful defaulters, certain NPA holders, convicted persons, disqualified directors and more.
• For the NPA ground in 29A(c), the account must be an NPA for at least one year before CIRP begins. The person can still be eligible by paying all overdue amounts with interest and charges before submitting the plan.
• A person with a connected person who is ineligible under clauses (a) to (i) is also ineligible under clause (j).
• Section 29A(h) applies to a guarantee given to a creditor that has been invoked and remains unpaid in full or part.

Common mistakes

• Treating an account overdue for exactly 90 days as an NPA. Fix: Write the test as 'overdue for more than 90 days' and check the strict inequality.
• Counting the 12 months for doubtful from the date of the loan. Fix: Start the clock on the date the account became an NPA, not the sanction date.
• Applying one rate to the whole outstanding amount Fix: Always compute the secured portion from the realisable value of security first. Apply the lower rate only to that part.
• Using the wrong doubtful rate Fix: Read how long the asset has been doubtful. Up to 1 year is 25%, 1 to 3 years is 40%, over 3 years is 100% on the secured portion.
• Treating SMA-2 as an NPA. Fix: An account is an NPA only after more than 90 days overdue. SMA-2 is still standard.
• Counting days from the date the bank sends a reminder. Fix: Always count from the due date of the unpaid amount.
• Saying a write-off waives the borrower's debt. Fix: Write-off is a book entry. The borrower still owes the money and the bank can keep pursuing recovery.
• Confusing a DRT with a Lok Adalat. Fix: A DRT adjudicates a recovery claim and can pass an order. A Lok Adalat works by compromise between the parties.
• Saying operational creditors vote on the resolution plan. Fix: Under Section 30(4), the plan is approved by a vote of the financial creditors on their voting share. Operational creditors are protected by the minimum-payment rule in Section 30(2)(b), not by a vote on the plan.
• Quoting the approval threshold as 75%. Fix: The current Section 30(4) text says not less than sixty-six per cent. of voting share.

Exam tips

• In MCQs, watch the strict wording: 'more than 90 days' versus 'up to 90 days'.
• Count days carefully using actual month lengths, and always start from the due date.
• In case scenarios, underline the dates first. Most answers follow from the day-count.
• Give a reason with every category you name. One line of reasoning earns marks that a bare label does not.
• Link classification to provisioning only if the question asks. Otherwise keep the answer tight.
• In numerical questions, show the secured and unsecured split for each account. Marks are given for steps.
• Learn the doubtful rates by time band: 25%, 40%, 100% on the secured part, and 100% on the unsecured part.
• Section A MCQs often test the difference between gross and net NPA, or the effect of a higher provision on profit and capital. Read the denominator carefully.