Skip to content

Risk Management in Banking and Insurance · Management of Non-Performing Assets (NPAs)

NPA Concept and RBI Asset Classification Norms

Updated 11 October 2026 · Fact-checked

A non-performing asset (NPA) is a loan or advance on which interest or principal stays overdue beyond the period RBI prescribes, generally more than 90 days. Banks classify assets as standard, sub-standard, doubtful or loss. To solve questions, find the overdue days, apply the 90-day test, then place the asset by its age in NPA and the realisable value of its security.

Understand NPA Concept and Asset Classification Norms

A bank earns income mainly from interest on loans. If the borrower stops paying, the bank stops receiving cash but may still show the interest as income. This overstates profit. RBI's income recognition norm fixes this: interest on an asset is recognised only when it is actually received, once the asset turns non-performing.

A non-performing asset (NPA) is a loan or advance that has stopped generating income for the bank. The usual test is that interest or instalment of principal remains overdue for more than 90 days in a term loan. Other facility types have their own tests (for example, an account that is out of order, or a bill that stays overdue). Learn the 90-day rule first, and the variants as add-ons.

Asset classification sorts loans by credit quality. The four categories are:

  • Standard asset: performs normally and carries no more than normal business risk.
  • Sub-standard asset: has been an NPA for a period up to 12 months.
  • Doubtful asset: has stayed sub-standard for 12 months. Recovery in full looks doubtful.
  • Loss asset: the bank, its auditors or RBI inspectors have identified the loss, but it has not been fully written off. It is considered uncollectible, or of so little value that keeping it as a bank asset is not justified.

An asset moves down the categories with time and with the weakening of security. Classification is done account by account, and it drives how much provision the bank must set aside. The provisioning rates themselves are covered in the separate provisioning topic.

The legal backdrop matters too. Under the SARFAESI Act, 2002, RBI can direct asset reconstruction companies on income recognition, accounting standards, provisions for bad and doubtful debts, capital adequacy and deployment of funds. So the same discipline reaches ARCs that buy NPAs from banks.

Key rules to remember

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.

How to solve NPA Concept and Asset Classification Norms questions

Use this sequence for any numerical or case question on NPA identification and classification.

  1. 1List the facts: type of facility, due date of the overdue amount, the reporting date, and security details.
  2. 2Count the days overdue from the due date to the reporting date.
  3. 3Apply the 90-day test. If overdue is 90 days or fewer, the account stays standard; if more, it is an NPA.
  4. 4If it is an NPA, note the date it became NPA, and measure the time since then.
  5. 5Classify: up to 12 months as an NPA is sub-standard; after 12 months it is doubtful; if the loss is identified and uncollectible it is loss.
  6. 6Check the security. A loss identified by the bank, auditors or RBI inspectors puts the asset in loss regardless of age.
  7. 7State the income recognition consequence: interest is booked only on receipt.
  8. 8Write a one-line conclusion naming the category and the reason.

Quickest way: Day-count and timeline shortcut

When to use it: For MCQs and short case questions where you must name the category quickly.

  1. Ask first: is the amount overdue more than 90 days? If no, standard.
  2. If yes, ask how long it has been an NPA. Up to 12 months means sub-standard.
  3. More than 12 months in sub-standard means doubtful.
  4. Look for the words 'identified as uncollectible' or 'loss identified by auditors or RBI'. That means loss.
  5. Eliminate options that mix up the order of the categories.

Common mistakes in NPA Concept and Asset Classification Norms

  • Treating an account overdue for exactly 90 days as an NPA.

    Students remember '90 days' and ignore 'more than'.

    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.

    Confusion between loan age and NPA age.

    Fix: Start the clock on the date the account became an NPA, not the sanction date.

  • Saying a loss asset has been written off.

    The word 'loss' suggests the amount is gone from the books.

    Fix: A loss asset is one identified as a loss but not fully written off. Say so exactly.

  • Booking accrued interest as income on an NPA.

    Accrual accounting habit.

    Fix: On an NPA, interest is recognised only when received.

  • Mixing up sub-standard and doubtful by looking only at security.

    Students think the distinction is about how bad the security is.

    Fix: The primary distinction is time as an NPA: up to 12 months sub-standard, beyond that doubtful.

  • Applying provisioning percentages in a classification question.

    Both topics are studied together and blur.

    Fix: If the question asks only for classification, give the category and the reason. Add provisioning only when asked.

Worked examples

Example 1

A bank has a term loan of ₹50,00,000 to Sharma Textiles. The instalment due on 31 March was not paid. On 30 June the amount is still unpaid. Classify the account on 30 June and state how the interest is treated.

Show the solution
  1. Due date is 31 March. Reporting date is 30 June.
  2. Days overdue: April 30 + May 31 + June 30 = 91 days.
  3. 91 days is more than 90 days, so the 90-day test is met.
  4. The account is an NPA. It has just become an NPA, so it is within the first 12 months and is sub-standard.
  5. Interest on the account is now recognised only when actually received.

Answer: The account is a non-performing, sub-standard asset on 30 June, because the instalment has been overdue for 91 days. Interest is booked only on receipt.

Example 2

Mehta Steels' term loan was classified as an NPA on 1 April 2025. By 1 May 2026 no recovery has been made and the dues remain unpaid. The bank's auditors have not identified the loan as a loss. Classify the asset as on 1 May 2026 and explain why it is not a loss asset.

Show the solution
  1. Date of becoming NPA: 1 April 2025. Reporting date: 1 May 2026.
  2. Time as NPA: 13 months, which is more than 12 months.
  3. An asset that has remained sub-standard for 12 months becomes doubtful.
  4. A loss asset needs the loss to be identified by the bank, its auditors or RBI inspectors, and the asset not fully written off. No such identification exists here.
  5. So the asset stays in the doubtful category.

Answer: The loan is a doubtful asset on 1 May 2026, as it has been an NPA for 13 months. It is not a loss asset because no loss has been identified by the bank, auditors or RBI.

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.

Practice questions from Management of Non-Performing Assets (NPAs)

NPA Concept and Asset Classification Norms in other exams

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

NPA Concept and Asset Classification Norms: frequently asked questions

What is an NPA under RBI norms?

It is a loan or advance that no longer generates income for the bank. For a term loan, the test is that interest or an instalment of principal remains overdue for more than 90 days.

What is the difference between sub-standard and doubtful assets?

A sub-standard asset has been an NPA for up to 12 months. A doubtful asset has remained sub-standard for 12 months, so full recovery is in doubt.

What is a loss asset?

It is an asset where the loss has been identified by the bank, its auditors or RBI inspectors but is not fully written off. It is regarded as uncollectible.

Why does RBI have income recognition norms?

Without them, banks could show unpaid interest as income and overstate profit. The norms keep reported earnings tied to actual cash received on non-performing accounts.