Risk Management in Banking and Insurance · Credit Risk Management

Asset Classification, NPAs and Provisioning Norms

Updated 11 October 2026 · Fact-checked

An NPA is a loan on which interest or principal stays overdue for more than 90 days. RBI classifies assets as standard, sub-standard, doubtful or loss, and sets minimum provisions for each. To solve questions, fix the category by overdue period or time in sub-standard, then apply the provision rate to the right base.

Understand Asset Classification, NPAs and Provisioning

A bank earns by lending, so a loan that stops paying is a problem. RBI therefore sets clear rules to decide when a loan is no longer earning, how much the bank must set aside against it, and how it should be resolved.

A loan becomes a Non-Performing Asset (NPA) when interest or instalment of principal remains overdue for more than 90 days (term loans). Overdraft and cash credit accounts are NPA if out of order for more than 90 days. Out of order means the outstanding stays continuously above the sanctioned limit or drawing power, or there are no credits for 90 days, or credits do not cover the interest debited.

NPAs fall into three groups. Sub-standard: an NPA for up to 12 months. Doubtful: an asset that has remained in the sub-standard category for 12 months. Loss: an asset identified as uncollectable, by the bank, its auditors or RBI, but not yet fully written off. Loans that are not NPA are standard assets. Banks also track Special Mention Accounts (SMA) as early warning for stress before the 90-day line.

Provisioning means setting aside part of profit to absorb expected losses. Rates rise as the asset gets worse. Provision is usually charged on the outstanding balance, and for doubtful assets it is split between the secured portion (covered by realisable security) and the unsecured portion. Higher provision cuts profit and capital, so NPAs hurt a bank twice: lost interest and lower earnings.

Recovery and resolution tools sit beside provisioning. The SARFAESI Act, 2002 lets secured creditors enforce security without going to court, after a 60-day notice. The Insolvency and Bankruptcy Code, 2016 (IBC) offers a time-bound corporate insolvency resolution process run by a resolution professional and the committee of creditors. Other tools include restructuring, one-time settlement, Lok Adalats and Debt Recovery Tribunals.

Under IFRS 9 the approach differs. It uses an expected credit loss (ECL) model with stages, so provision is made on expected losses even before default. RBI's norms are largely rule-based on days past due, though RBI has proposed moving Indian banks to an ECL framework. For exams, learn the RBI rules as the main answer and the ECL contrast as a comparison point.

Key rules to remember

NPA test (term loans): Overdue > 90 days → NPA; Interest or principal overdue for more than 90 days. Standard assets are not overdue beyond this.
Sub-standard asset: NPA for ≤ 12 months; Secured sub-standard asset: provision 15% of outstanding. If the exposure is unsecured, the rate is 25% (15% + 10% additional). An exposure is unsecured where the realisable value of the security, as assessed by the bank, approved valuers or RBI's inspecting officers, is not more than 10% ab initio (from the start) of the outstanding.
Doubtful asset: Sub-standard for 12 months; Secured portion: 25% (up to 1 year), 40% (1-3 years), 100% (over 3 years). Unsecured portion: 100%.
Loss asset: Provision = 100% of outstanding; Applies to the amount not written off.
Unsecured sub-standard exposure: Provision = 25% of outstanding; Where the realisable value of security is not more than 10% ab initio of the outstanding (as assessed by the bank, approved valuers or RBI), the sub-standard rate is 25%, not 15%.
Doubtful provision: Provision = 100% × unsecured portion + rate × secured portion; Unsecured portion = outstanding − realisable value of security.
Net NPA: Net NPA = Gross NPA − provisions held; Net NPA ratio = Net NPA ÷ Net advances.
Gross NPA ratio: Gross NPA ÷ Gross advances × 100; Key measure of asset quality.
Provision Coverage Ratio: PCR = Provisions held against NPAs ÷ Gross NPA × 100; Shows how much of NPAs is already covered.
Standard asset provision: Provision = standard asset rate for the sector × outstanding; Standard asset provision rates vary by sector: 0.25% for direct advances to agriculture and SMEs, 0.40% for other (general) standard advances, 0.75% for commercial real estate - residential housing (CRE-RH), and 1% for commercial real estate (CRE). Use the rate given in the question.

How to solve Asset Classification, NPAs and Provisioning questions

Use this order for any classification or provisioning question. Do not start with percentages. Start with the status of the account.

1Read the facts: loan type, outstanding, overdue days, security value and how long the account has been NPA.
2Test for NPA: more than 90 days overdue, or out of order for overdraft and cash credit.
3If NPA, classify: sub-standard for up to 12 months, doubtful after that, loss if identified as uncollectable.
4For doubtful assets, split the outstanding into secured part (realisable value of security, capped at outstanding) and unsecured part.
5Pick the rate: sub-standard 15% (25% if unsecured ab initio); doubtful secured 25%, 40% or 100% by age; unsecured part 100%; loss 100%.
6Compute provision for each portion and add them.
7Compute Net NPA, if asked: Gross NPA less provisions held.
8State the effect: lower profit and capital, and name the suitable recovery route such as SARFAESI or IBC.

Quickest way: Two-line classification and split table

When to use it: Use it in numerical questions with several accounts and limited time.

Make a small table with columns: account, outstanding, category, secured, unsecured, provision.
Write the category first from the overdue days or time as NPA, before touching any figure.
Compute the unsecured part as outstanding minus security value; apply 100% to it for doubtful accounts.
Apply the secured rate by age only to the secured part, then total the column.
Check: provision should never exceed outstanding, and a loss asset must show 100%.

Common mistakes in Asset Classification, NPAs and Provisioning

Applying the doubtful provision percentage to the whole outstanding.
Students remember one rate per category and ignore the secured/unsecured split.
Fix: Always split the balance. Unsecured portion gets 100%; only the secured portion gets 25%, 40% or 100% by age.
Using 90 days as the test for every account type.
The rule is remembered loosely.
Fix: For overdraft and cash credit, test whether the account is out of order. For term loans, test overdue instalments or interest.
Treating a doubtful asset's age from the loan date instead of from when it became doubtful.
The wording about period is confusing.
Fix: Count the years in the doubtful category, after the first 12 months as sub-standard.
Forgetting the 25% rate for unsecured sub-standard exposure.
Students memorise only 15%.
Fix: Check whether the exposure is unsecured: the realisable value of security is not more than 10% ab initio of the outstanding. If so, use 25% for sub-standard.
Mixing up SARFAESI and IBC.
Both are recovery laws for lenders.
Fix: SARFAESI enforces security by the secured creditor without court. IBC is a collective, time-bound process led by a resolution professional, with moratorium and committee of creditors.
Saying IFRS 9 and RBI norms are the same.
Both require provisions.
Fix: RBI norms follow days past due and fixed rates. IFRS 9 uses forward-looking expected credit loss in stages, so provisions start earlier.

Worked examples

Example 1

A bank has a term loan of ₹80,00,000 classified as doubtful for 2 years. Realisable value of security is ₹50,00,000. Compute the provision required.

Show the solution

Outstanding = ₹80,00,000; security value = ₹50,00,000.
Secured portion = ₹50,00,000; unsecured portion = ₹80,00,000 − ₹50,00,000 = ₹30,00,000.
Doubtful for 2 years, so the secured rate is 40%.
Provision on secured portion = 40% × ₹50,00,000 = ₹20,00,000.
Provision on unsecured portion = 100% × ₹30,00,000 = ₹30,00,000.
Total provision = ₹20,00,000 + ₹30,00,000 = ₹50,00,000.

Answer: Provision required = ₹50,00,000.

Example 2

A bank reports Gross advances ₹5,000 crore and Gross NPAs ₹250 crore. Provisions held against NPAs are ₹150 crore. Compute Gross NPA ratio, Net NPA ratio (taking net advances as gross advances less provisions held against NPAs) and Provision Coverage Ratio.

Show the solution

Gross NPA ratio = 250 ÷ 5,000 × 100 = 5%.
Net NPA = 250 − 150 = ₹100 crore.
Net advances = 5,000 − 150 = ₹4,850 crore.
Net NPA ratio = 100 ÷ 4,850 × 100 = 2.06% (approx).
PCR = 150 ÷ 250 × 100 = 60%.

Answer: Gross NPA ratio 5%; Net NPA ratio about 2.06%; PCR 60%.

Exam tips

In MCQs, the usual traps are the 90-day test, 15% versus 25% for sub-standard, and the 100% rate on the unsecured doubtful part.
Show the secured/unsecured split in a table even for small numericals. It earns method marks.
In a case scenario, state the category first, then provision, then the effect on profit and capital.
For SARFAESI versus IBC answers, compare by who acts, need for court, time limit and outcome, in a short table-like list.
Mention that RBI is moving banks toward an expected-credit-loss framework when comparing with IFRS 9, but base calculations on the current rule-based norms given in the question.

Practice questions from Credit Risk Management

Asset Classification, NPAs and Provisioning in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Asset Classification, NPAs and Provisioning: frequently asked questions

When does a loan become an NPA as per RBI?

A term loan becomes an NPA when interest or principal is overdue for more than 90 days. An overdraft or cash credit becomes an NPA when it stays out of order for more than 90 days.

What are the provisioning percentages for sub-standard, doubtful and loss assets?

Sub-standard is 15% of outstanding, or 25% if the exposure is unsecured, meaning the realisable value of security is not more than 10% ab initio of the outstanding. Doubtful secured portion is 25%, 40% or 100% by age, and the unsecured portion is 100%. Loss assets need 100%.

What is the difference between SARFAESI and IBC?

SARFAESI lets a secured creditor take over or sell the security without court after notice. IBC starts a collective insolvency process led by a resolution professional and committee of creditors, with a moratorium.

How is IFRS 9 expected credit loss different from RBI provisioning?

RBI norms depend on days past due and fixed percentages by asset category. IFRS 9 estimates expected losses in stages, so provisions are made earlier, even on performing loans.