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

Provisioning Norms for NPAs and Their Impact on Banks

Updated 11 October 2026 · Fact-checked

Provisioning means a bank sets aside part of its profit to cover expected loss on a loan. The rate depends on the asset category: standard, sub-standard, doubtful or loss. To solve a question, split each exposure into secured and unsecured parts, apply the rate, add up, then link the charge to profit and capital.

Understand Provisioning Norms and Impact of NPAs on Banks

A loan becomes a non-performing asset (NPA) when the borrower stops paying as per RBI's asset classification norms. The bank may not recover all of it. So RBI requires the bank to provide for the likely loss. A provision is a charge against profit. It is not a cash outflow, but it lowers profit and reserves.

The provision rate rises as the asset worsens. A standard asset carries a small general provision. A sub-standard asset carries a higher rate. A doubtful asset carries a rate that rises with the time spent in the doubtful category. A loss asset is provided in full or written off. The unsecured part of an exposure always carries a higher rate than the secured part.

Gross NPA is the total of all NPAs before deducting anything. Net NPA is gross NPA less the provisions held against it. Net NPA shows the loss the bank has not yet covered. The provision coverage ratio shows how much of gross NPA has been covered by provisions.

NPAs hurt a bank in three ways. Profit falls, because provisions are charged to the profit and loss account and interest income stops accruing. Capital falls, because lower profit means lower retained earnings, while the risk weight on NPAs raises risk-weighted assets. Lending falls, because the bank has less capital and funds are tied up in stuck loans, so it lends less and prices loans higher.

Sales to asset reconstruction companies are one way to clear NPAs. Under the SARFAESI Act, 2002, an asset reconstruction company needs a certificate of registration from the Reserve Bank (Section 3). It must have net owned fund of at least ₹2 crore or such higher amount as RBI notifies. RBI can also direct these companies on income recognition, accounting standards and provisioning for bad and doubtful debts (Section 12).

Key rules to remember

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.

How to solve Provisioning Norms and Impact of NPAs on Banks questions

Use this order for any numerical or descriptive question on provisioning and NPA impact.

1Classify each account: standard, sub-standard, doubtful (note the years in doubtful) or loss.
2Split each NPA into secured and unsecured parts using the realisable value of security.
3Apply the rate for that category to each part. Unsecured doubtful portions take 100%.
4Add the provisions for all accounts. Show each line so you earn step marks.
5If asked for ratios, compute gross NPA, net NPA (gross NPA less provisions), the ratios and the coverage ratio.
6State the impact: provision is charged to profit, capital and reserves fall, and risk-weighted assets and lending capacity are affected.
7Close with a one-line comment or recommendation, such as raising recovery effort or capital.

Quickest way: Table-and-total method

When to use it: Use it for MCQs and short numerical questions with several accounts.

Write three columns: category, secured, unsecured.
Fill in the rates: sub-standard 15% and 25%; doubtful 25% or 40% or 100% and 100%; loss 100%.
Multiply and add across. Check the unsecured part is never provided at a lower rate than the secured part.
For ratios, write gross NPA, minus provisions, then divide. Do not mix up denominators.

Common mistakes in Provisioning Norms and Impact of NPAs on Banks

Applying one rate to the whole outstanding amount
Students forget the secured and unsecured split.
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
Students confuse the age of the loan with the time in the doubtful category.
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.
Deducting provisions from gross advances for gross NPA ratio
Students mix gross and net definitions.
Fix: Gross NPA ratio uses gross NPA and gross advances. Only net NPA deducts provisions.
Treating provision as a cash payment
The word 'set aside' sounds like cash leaving the bank.
Fix: Say it is a charge to the profit and loss account that reduces profit and reserves. No cash moves.
Ignoring the capital effect in impact answers
Students write only 'profit falls'.
Fix: Add that lower retained earnings reduce capital, risk-weighted assets rise on NPAs, and the capital adequacy ratio falls, which limits fresh lending.
Forgetting standard asset provision in the total
Students think provisioning applies only to NPAs.
Fix: If the question gives standard advances, add the general provision at the stated rate.

Worked examples

Example 1

A bank has three NPA accounts. Account A is sub-standard: outstanding ₹1,00,00,000, realisable value of security ₹70,00,000. Account B has been doubtful for 2 years: outstanding ₹60,00,000, realisable value of security ₹40,00,000. Account C is a loss asset: outstanding ₹5,00,000. Compute the total provision using the usual RBI rates.

Show the solution

Account A: secured portion = ₹70,00,000; unsecured portion = ₹1,00,00,000 − ₹70,00,000 = ₹30,00,000.
Account A provision = 15% × ₹70,00,000 + 25% × ₹30,00,000 = ₹10,50,000 + ₹7,50,000 = ₹18,00,000.
Account B: secured portion = ₹40,00,000; unsecured portion = ₹60,00,000 − ₹40,00,000 = ₹20,00,000.
Doubtful for 1 to 3 years, so the secured rate is 40%. Provision = 40% × ₹40,00,000 + 100% × ₹20,00,000 = ₹16,00,000 + ₹20,00,000 = ₹36,00,000.
Account C provision = 100% × ₹5,00,000 = ₹5,00,000.
Total = ₹18,00,000 + ₹36,00,000 + ₹5,00,000 = ₹59,00,000.

Answer: Total provision required is ₹59,00,000. It is charged to the profit and loss account, reducing profit and reserves.

Example 2

A bank reports gross advances of ₹5,000 crore, gross NPA of ₹250 crore and provisions held against NPAs of ₹150 crore. Compute the gross NPA ratio, net NPA, net NPA ratio and provision coverage ratio. Comment on the impact.

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% (rounded).
Provision coverage ratio = 150 ÷ 250 × 100 = 60%.
Comment: ₹100 crore of NPA is not yet covered. Further provisioning will reduce profit and capital, so the bank should speed up recovery or raise capital.

Answer: Gross NPA ratio 5%; net NPA ₹100 crore; net NPA ratio about 2.06%; provision coverage ratio 60%. Remaining uncovered NPAs will pressure profit, capital adequacy and lending capacity.

Exam tips

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.
For descriptive answers on impact, use three headings: profitability, capital adequacy and lending. Add a one-line recovery or resolution measure.
Use the rates the question gives. If none are given, state the RBI rates you assume.

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

Provisioning Norms and Impact of NPAs on Banks in other exams

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

Provisioning Norms and Impact of NPAs on Banks: frequently asked questions

What is the difference between gross NPA and net NPA?

Gross NPA is the total of all non-performing advances. Net NPA is gross NPA less the provisions held against it. Net NPA therefore shows the part of bad loans not yet covered by provisions.

How do I calculate provision for a doubtful asset?

Split the outstanding into secured and unsecured parts. Apply 25%, 40% or 100% to the secured part depending on whether the asset has been doubtful for up to 1 year, 1 to 3 years, or more than 3 years. Apply 100% to the unsecured part.

How do NPAs affect a bank's capital adequacy?

Provisions reduce profit and so retained earnings, which lowers capital. NPAs also attract risk weights, which raise risk-weighted assets. Both effects reduce the capital adequacy ratio.

Are the provisioning rates fixed for all time?

No. RBI revises them and has sector-specific rates, for example for standard assets. Use the rate stated in the question, and state the RBI rate you assume if none is given.