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CS Professional · Banking and Insurance - Laws and Practice

Performing and Non Performing Assets for CS Professional Banking Law

A **performing asset** is a loan that earns income and is serviced on time. A **non-performing asset (NPA)** is a loan where interest or principal stays overdue beyond the period set by RBI norms. To solve questions, you read the facts, apply the classification rule, then state provisioning, resolution or recovery steps.

What this chapter covers

This chapter covers how a bank decides whether a loan is healthy or stressed, and what it must do once stress appears. It starts with income recognition and asset classification: when a bank may book interest as income, and when an account becomes an NPA and moves into sub-standard, doubtful or loss categories. From there it moves to provisioning, which is the money a bank must set aside against bad loans.

The second half is about action. You study early warning through Special Mention Accounts (SMA), then resolution of stressed assets under the RBI's prudential framework, and finally recovery tools such as the SARFAESI Act, Debts Recovery Tribunals (DRTs) and asset reconstruction companies (ARCs).

This chapter sits in the Banking Laws part of Paper 7.4, Banking and Insurance - Laws and Practice, which carries 50 marks. It links to the chapters on the banker-customer relationship, lending and securities, and bank regulation. It also touches insolvency law, which is useful if you study Paper 6.

Asset quality is central to how RBI supervises banks, so examiners return to it often and test it through case-based questions. Because Paper 7.4 is a written paper, you earn marks by applying a rule to facts and reaching a conclusion, and this chapter suits that format well: a loan with given overdue dates must be classified, provisioned and then routed to a resolution or recovery step. The topics also build on each other, so strong preparation here lifts your answers across the Banking Laws part. Always read the RBI directions and the Acts as supplied in the study material, since percentages and timelines are revised from time to time.

Performing and Non Performing Assets: topics in the order to study them

  1. 1Performing and Non-Performing Assets ConceptsYou need the basic vocabulary of performing assets, NPAs and overdue before you can read any norm.
  2. 2Income Recognition and Asset Classification NormsOnce the concepts are clear, you learn the rules that decide when income is booked and when an account is classified as an NPA.
  3. 3Provisioning Norms for AdvancesProvisioning follows directly from the asset category, so you must know classification first.
  4. 4Special Mention Accounts and Early Recognition of StressThis shows how stress is flagged before an account turns into an NPA, building on the classification logic.
  5. 5Resolution of Stressed AssetsAfter you know how stress is spotted, you learn how lenders try to fix it.
  6. 6Recovery Mechanisms: SARFAESI, DRT and ARCsRecovery applies when resolution fails, so it comes last and draws on everything before it.

How to prepare Performing and Non Performing Assets

Treat this chapter as a sequence: spot the asset type, apply the rule, then choose the remedy. Practise it that way.

  1. Read the concepts and write your own one-line definitions of performing asset, NPA, overdue and SMA.
  2. Build a single timeline chart showing days overdue against the classification or SMA stage, using the figures in the study material.
  3. Learn the provisioning categories and the reasoning behind them. Check the current rates in the latest RBI text before you fix numbers in memory.
  4. Create a table of resolution routes and recovery routes, noting who can use each, the trigger and the forum.
  5. Study SARFAESI step by step: notice, possession, sale. Note the conditions and the exceptions.
  6. Practise short case problems. For each, write the provision, the analysis of facts and the conclusion in that order.
  7. Revise from your charts twice before the exam, and re-check any rule that RBI has updated.

Common mistakes in Performing and Non Performing Assets

  • Mixing up SMA stages with NPA categories

    Fix: Remember that SMA is a warning stage for accounts still treated as standard, while NPA categories apply after the account is classified as non-performing.

  • Quoting provisioning percentages from memory without checking the current text

    Fix: Learn the principle first, then confirm the numbers in the latest supplied text before the exam.

  • Counting overdue days from the wrong date

    Fix: Count from the due date of the unpaid amount and mark it on a timeline before you classify.

  • Treating SARFAESI as available for every loan

    Fix: Check that the debt is secured, the account is an NPA and the case is not within an exclusion in the Act before applying it.

  • Writing only definitions in case-based answers

    Fix: Use the structure of provision, analysis of the facts and conclusion, and quote figures from the case.

  • Confusing the roles of DRT, ARC and the secured creditor

    Fix: Note for each one who acts, under which law and at which stage, then revise that table.

Last-day revision: Performing and Non Performing Assets

  • An NPA is an advance where interest or principal remains overdue beyond the period fixed by RBI norms.
  • Income on an NPA is not recognised on an accrual basis; the bank books it only when actually received.
  • Classification depends on how long the account is overdue and on the borrower's condition.
  • Categories run from standard to sub-standard, doubtful and loss assets.
  • Provisioning rises as asset quality worsens, so loss assets need the highest provision.
  • SMA categories flag early stress, based on the number of days an account is overdue.
  • Early recognition lets lenders act before the account becomes an NPA.
  • Resolution follows the RBI prudential framework, with timelines and conditions for an implementation plan.
  • SARFAESI lets secured creditors enforce security without going to court, subject to conditions in the Act.
  • DRTs hear recovery claims by banks and financial institutions above the threshold set in law.
  • ARCs buy stressed assets from lenders and work to resolve or recover them.
  • Always write the rule, apply it to the facts, then conclude.

Performing and Non Performing Assets practice questions

Performing and Non Performing Assets in other exams

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

Performing and Non Performing Assets: frequently asked questions

What is the difference between a performing and a non-performing asset?

A performing asset is a loan that is serviced on time and earns income for the bank. A non-performing asset is one where interest or principal remains overdue beyond the limit set by RBI norms. The bank then changes how it books income and sets aside provisions.

Do I need to memorise exact provisioning percentages?

Learn the logic first, that worse asset quality needs higher provisioning. Then memorise the percentages given in your latest study material, since these can be revised. In answers, state the category before you give the figure.

How is SMA different from an NPA?

SMA is an early warning label for accounts showing stress, based on days overdue, before they become NPAs. An NPA is a formal classification once the account crosses the prescribed overdue period. SMA lets lenders act sooner.

How should I answer a case-based question on this chapter?

Identify the type of asset and the overdue position from the facts. Apply the relevant norm, state the provision or remedy, and end with a clear conclusion. Showing each step earns more marks than a bare answer.