PPB Unit CChapter Notes7–8 Marks Expected

Non-Performing Assets / Stressed Assets

Principles & Practices of Banking | Unit C · Chapter 28

When a loan stops earning interest for the bank, it crosses a critical threshold — it becomes a Non-Performing Asset. This chapter covers everything from the precise 90-day trigger, through the three-tier asset classification ladder, to provisioning rates, income reversal, the SMA early-warning system, and the structured Resolution Plan framework. Chapter 27 (Documentation) showed how to create enforceable debt instruments; this chapter deals with what happens when those instruments fail to perform.

By Bankopedia.co.inUpdated 2026JAIIB PPB · Module C

📌 Why This Chapter Matters in JAIIB

Expect 7–8 questions from this chapter — it is one of the highest-yield topics in PPB. The examiner tests three clusters: (1) NPA triggers — exactly when an account becomes NPA (90 days, out-of-order, crop seasons); (2) Asset classification & provisioning — the three categories and the exact provision percentages for each stage of doubtful; (3) Resolution framework — the SMA sub-categories (0/1/2), Review Period (30 days), and the 180-day RP implementation window with 20% additional provisioning if missed. Provisioning numbers are a near-certain numerical question every attempt.

Key Numbers & Thresholds — Chapter 28 at a Glance

90 daysNPA trigger: term loans, bills purchased/discounted, derivatives, securitisation

Out of Order90 days: no credits, or credits < interest debited, or balance exceeds limit

2 crop seasonsNPA threshold for short-duration crop loans (crops < 1 year)

1 crop seasonNPA threshold for long-duration crop loans (crops > 1 year)

≤ 12 months as NPASubstandard asset (w.e.f. 31 March 2005)

> 12 months as Sub-stdDoubtful asset (w.e.f. 31 March 2005)

25 / 40 / 100 %Provisioning on secured doubtful: up to 1 yr / 1–3 yrs / >3 yrs

15 % (+ 10 % extra)Provisioning for substandard (25% total if unsecured)

100 %Provisioning for loss assets

70 %Provisioning Coverage Ratio (PCR) benchmark — as of Sep 30, 2010

SMA-0 / 1 / 2Overdue 1–30 / 31–60 / 61–90 days — early stress warning system

30 daysReview Period: prima facie review after first default is reported

180 daysResolution Plan (RP) must be implemented from end of Review Period

20 %Additional provision if viable RP not implemented within 180 days

₹5 croreCRILC reporting threshold (aggregate exposure); also mandatory stock audit threshold

₹100 croreIndependent Credit Evaluation (ICE) required for restructuring above this

Section 1

What Makes a Loan Non-Performing? The IRAC Definition

The Core Idea

A bank earns money from its advances primarily through interest. The moment a loan account stops generating that interest income — because the borrower has stopped paying — the asset is no longer "performing." RBI introduced the Income Recognition and Asset Classification (IRAC) norms, on the recommendation of the Narasimham Committee, to bring consistency and transparency to how banks account for such troubled loans.

The key policy principle: income must be recognised based on the actual record of recovery, not on the assumption that future payments will arrive on time. If money hasn't come in, it should not be booked as income.

Seven Triggers That Turn an Account into an NPA

Term LoansInterest and/or principal instalment overdue for more than 90 days

Bills Purchased/DiscountedBill remains unpaid for more than 90 days after due date

Overdraft / Cash CreditAccount falls "out of order" — see the three sub-conditions below

Short-Duration CropsPrincipal or interest overdue for two consecutive crop seasons (crop ≤ 1 year)

Long-Duration CropsPrincipal or interest overdue for one crop season (crop > 1 year)

SecuritisationLiquidity facility outstanding for more than 90 days in a securitisation transaction

DerivativesOverdue receivables representing positive mark-to-market value, unpaid for 90+ days

🧠 Mnemonic — Seven NPA Triggers

T = Term loans (90d)

B = Bills (90d)

O = OD/CC (out-of-order)

S = Short crops (2 seasons)

L = Long crops (1 season)

Se = Securitisation (90d)

D = Derivatives (90d)

"Two Banks On Steroids Leave Sliding Doors" → T-B-O-S-L-Se-D

28.2.2

"Out of Order" — Three Conditions for OD/CC Accounts

An overdraft or cash credit account is treated as "out of order" if any one of these three conditions persists for 90 days continuously:

1Outstanding balance remains continuously in excess of the sanctioned limit or drawing power
2Balance is within limits BUT no credits at all have been posted for 90 days
3Balance is within limits BUT credits posted are insufficient to cover the interest debited during the past 90 days

⚠️ Exam trap

It is not enough that credits exist — they must be sufficient to cover at least the interest debited. A token credit of ₹100 in an account where ₹10,000 of interest was debited still keeps the account "out of order."

28.2.3 — What "Overdue" Means

Any amount due to the bank — whether principal, interest, or any other charge — that has not been paid on or before the date it fell due, is termed "overdue." The 90-day clock starts from the day after the due date.

Section 2

Three Grades of NPA — Asset Classification

Once an account turns NPA, it does not stay in a single bucket forever. RBI requires banks to classify NPAs into three progressively severe categories based on how long the account has remained non-performing and how likely recovery is. Think of it as a disease that gets worse the longer it is left untreated.

⚠️Substandard

NPA for ≤ 12 months

Credit weaknesses are visible and well-defined. Full recovery is uncertain but not impossible. The bank will likely suffer some loss if problems are not corrected quickly.

🔴Doubtful

In Substandard > 12 months

Carries all the weaknesses of a substandard asset — but collection or full liquidation is now highly questionable. The probability of recovery in full is very low given known facts and current security values.

❌Loss

Identified as uncollectible

The bank, its auditors, or RBI inspectors have identified this as a loss — but the amount has not yet been written off. The asset has no meaningful value as a bankable asset, though some salvage may exist.

🧠 Mnemonic — Three NPA Categories in Order

S = Substandard (≤12 mo)

D = Doubtful (>12 mo in S)

L = Loss (identified, not w/o)

"SuDoL" — Sub-standard → Doubtful → Loss. Severity rises left to right; provision percentage rises left to right.

Key Classification Guidelines (28.5.2)

→Classification is borrower-wise, not facility-wise — if one facility to a borrower turns NPA, ALL facilities to that borrower are classified NPA.
→Availability of security or net worth of the borrower does NOT prevent classification as NPA; it only affects the provisioning rate.
→Temporary deficiencies (outdated stock statements, limit not yet renewed) should not automatically trigger NPA — but delay beyond 180 days from due date will.
→If arrears of both principal and interest are fully paid by the borrower, the NPA can be upgraded back to Standard.
→Accounts with potential threats to recovery (fraud, security erosion) may be directly classified as Doubtful or Loss — skipping Substandard.
→Agricultural advances follow crop-season rules. Advances against term deposits, NSCs, KVPs, IVPs, and life policies are exempted from NPA classification.
→Central Government guaranteed loans are treated as NPA only when the Government formally repudiates its guarantee. (State Government guarantees attract normal norms from 31 March 2006.)

Section 3

Income Recognition — How Banks Account for NPA Interest

The Golden Rule

For performing (Standard) assets, income is booked on an accrual basis — as it falls due, even if not yet received. For NPAs, the opposite applies: income can only be booked on a cash basis — only after the bank has actually received the money in its account.

💡 Why this matters

If a bank were allowed to keep booking income from defaulted loans, its profit figures would be overstated — presenting a healthier picture than reality. IRAC norms prevent this by requiring income reversal the moment an account slips to NPA.

Income Recognition Rules — Category by Category

Interest on term loans / billsStop accruing interest the day the account becomes NPA. Reverse all interest already booked but not received. Record further interest in a Memorandum Account only — do not credit P&L.

Interest on secured instrumentsInterest on advances against term deposits, NSCs, IVPs, KVPs, and life policies may still be taken to income on the due date — provided adequate margin exists.

Finance charge on leased assetsIf a leased asset turns NPA, reverse or provide for any finance charge component already booked but not collected.

Fees and commissionsCease accruing from the date of NPA. Reverse amounts already booked for prior periods if not yet collected.

Government guaranteed accountsSame reversal rules apply — the government guarantee does not allow income to remain on the books.

Renegotiated feesFees earned from renegotiation or rescheduling are recognised on accrual — spread over the extended credit period (not a lump sum).

Interest Suspense Account

When an account turns NPA, banks reverse interest already charged by debiting the P&L account and stop further interest entries in the main account. The accrued interest may continue to be tracked in a Memorandum Account. Crucially, this memorandum interest must not be included when computing Gross Advances.

Appropriation of Recoveries

When any money is recovered on an NPA account, the bank must have a clear, board-approved policy on whether it is applied first to outstanding interest or to principal. This policy must be applied uniformly and consistently — no ad-hoc decisions allowed.

Section 4

Provisioning Norms for NPAs

Provisioning is the practice of setting aside a portion of profits to cover anticipated loan losses. The amount set aside depends on how bad the asset has become — the weaker the asset, the more must be provided. All provisions are made before declaring profits, reducing the bank's net income in the short term but ensuring its balance sheet reflects true asset quality.

Loss Assets100% provision required

Loss assets should be written off entirely. If for any reason they remain on the books, 100% of the outstanding balance must be provided for — effectively treating the amount as already gone.

Doubtful Assets — Provision Rate by Age (Secured Portion)

Time in Doubtful Category	Provision on Secured Portion	Provision on Unsecured Portion
Up to 1 year (Doubtful I)	25 %	100 %
1–3 years (Doubtful II)	40 %	100 %
More than 3 years (Doubtful III)	100 %	100 %

Stock audit by external agencies is mandatory for NPA accounts with balance ≥ ₹5 crore (annual). Immovable property charged as security must be valued every 3 years by board-approved valuers.

🧠 Mnemonic — Doubtful Provision Rates

25% — Year 1 (Quarter stake)

40% — Years 1-3 (Getting serious)

100% — After 3 yrs (Write it off)

"A Quarter, Nearly Half, Gone" → 25 → 40 → 100. And the unsecured portion is always 100% regardless of age.

Substandard

Provisioning for Substandard Assets

→General provision: 15% of total outstanding — without any credit for ECGC cover or available security
→If unsecured (realisable security < 10% of outstanding): additional 10% provision → total 25%
→Exception: Infrastructure loan substandard assets (with escrow arrangement) → 20% instead of 25%

⚠️ Definition of "Unsecured Exposure"

An exposure where the realisable value of the security (as assessed by bank/approved valuers) is 10% or less of the outstanding exposure. Intangible securities (guarantees, comfort letters) do NOT count as "security" for this definition.

Floating Provisions — Creation & Use

Banks may voluntarily create floating provisions — a general buffer over and above the mandatory amounts — under a board-approved policy. These are held separately for advances and investments.

→Cannot be reversed by crediting the P&L account
→Can only be used for specific provisions in extraordinary circumstances (e.g., civil unrest, currency collapse, natural calamities, market meltdown) — with prior RBI permission
→Can be netted from gross NPAs when reporting net NPAs
→Can be treated as Tier II capital (within the 1.25% of total risk-weighted assets ceiling)
→Full disclosure required in the notes on accounts to the balance sheet

Section 5

Provisioning for Standard Assets

Even healthy (Standard) assets require a small general provision — a precautionary buffer against potential future deterioration. These provisions are made on the outstanding funded amount on a global portfolio basis. Standard asset provisions are NOT deducted when computing Net NPAs and are not netted from Gross Advances.

Category of Standard Asset	Provision Rate
Farm credit (agriculture), individual housing loans, SME (Small & Micro)	0.25 %
All other loans and advances (including Medium Enterprises)	0.40 %
Commercial Real Estate — Residential Housing (CRE-RH)	0.75 %
Commercial Real Estate (CRE)	1.00 %
Housing loans at teaser rates (initial period)	2.00 %
Teaser-rate housing loans — after 1 year from rate reset (if still standard)	0.40 %
Advances in areas affected by natural calamities (restructured, treated as standard)	5.00 %

🧠 Mnemonic — Standard Asset Provision Rates

0.25 — Farm/Home/SME

0.40 — Rest (general)

0.75 — CRE-RH

1.00 — CRE

2.00 — Teaser rate

"Farm animals Go Resting, Commercial Real Estate Rises, Teasers are Twice" → 0.25 / 0.40 / 0.75 / 1.00 / 2.00

⚠️ Teaser Rate Rule — Exam Favourite

A teaser-rate housing loan starts at 2% provision. Once the interest rate is reset to the normal (higher) rate AND the account remains standard for 1 full year after that reset — the provision drops back to 0.40%. If the account deteriorates before that 1-year mark, it goes back to NPA treatment.

Section 6

Computing Gross NPA, Net NPA, and Advances

The Four Key Figures — Formulas

Gross Advances

= Standard Assets + Gross NPA

Excludes rediscounted bills and advances technically written off at HO level. Memorandum interest not included.

Gross NPA

= Principal dues of NPAs + FITL (where contra credit is in Sundries Account)

FITL = Funded Interest Term Loan created by converting unpaid interest during restructuring

Net Advances

= Gross Advances − Deductions (list below)

Net NPA

= Gross NPA − Deductions (same list)

Also expressed as: Net NPA ÷ Net Advances × 100

Deductions Applied to Both Gross Advances and Gross NPA

1DICGC / ECGC claims received and held pending adjustment
2Provisions held against NPA accounts (including any additional prescribed provisions)
3Part payments received and kept in Suspense Account or similar accounts
4Balance in Sundries Account (Interest Capitalisation — Restructured Accounts) for NPA accounts
5Floating Provisions (to the extent the bank has set them aside)

Provisioning Coverage Ratio (PCR)

PCR measures the proportion of bad loans a bank has already provided for. RBI set a benchmark PCR of 70% with reference to gross NPA position as on 30 September 2010. The surplus provision over and above the PCR must be segregated into a separate buffer, which can be used for specific NPA provisions during a system-wide downturn — with prior RBI approval. PCR must be disclosed in the notes on accounts to the balance sheet.

Section 7

Early Warning System — SMA Categories & Resolution Framework

Rather than waiting for a loan to slide all the way to NPA, RBI requires lenders to flag early signs of stress using a Special Mention Account (SMA) classification. This acts like a hospital triage system — catching deterioration before it becomes irreversible.

SMA Sub-Categories — Term Loans & Other Accounts

Category	Days Overdue (principal/interest/other)
SMA-0	1 – 30 days
SMA-1	31 – 60 days
SMA-2	61 – 90 days → at 91 days it becomes NPA

SMA for Revolving Credit (OD / Cash Credit)

Category	Days balance remains continuously above limit / drawing power
SMA-1	31 – 60 days
SMA-2	61 – 90 days

Note: There is no SMA-0 category for revolving credit (CC/OD) — it starts directly at SMA-1.

CRILC Reporting Obligations

→Lenders must report credit information (including SMA classification) to CRILC for all borrowers with aggregate exposure ≥ ₹5 crore
→CRILC-Main Report: submitted monthly
→Weekly report of default instances: all borrowers with aggregate exposure ≥ ₹5 crore
→CRILC data is shared across all lenders — so any lender that reports a default triggers the Review Period for all lenders to that borrower

Resolution Plan (RP) — Timeline & Sequence

Default occurs

Any one lender reports the borrower as in default. The Review Period clock starts.

30-day Review Period

All lenders must complete a prima facie review of the borrower account within 30 days of the first default being reported.

180-day RP window

A viable Resolution Plan must be fully implemented within 180 days from the end of the Review Period. The RP may involve restructuring, change in ownership, sale of exposure, or regularisation by the borrower.

Decision rule

Agreement of lenders holding 75% of outstanding credit (by value) and 60% by number binds all lenders, including dissenters — but dissenters must receive at least liquidation value.

⚠️ Penalty for Delayed Resolution Plan

Milestone missed	Additional Provision Required
RP not implemented within 180 days of end of Review Period	20% of total outstanding (funded + non-funded)
RP still not implemented after a further period (as prescribed)	Further additional provisions as prescribed

Reference Dates for Starting the Review Period

Aggregate Exposure to All Lenders	Reference Date
₹2,000 crore and above	June 7, 2019
₹1,500 crore and above, but < ₹2,000 crore	January 1, 2020
Less than ₹1,500 crore	To be announced separately

Section 8

Restructuring, Wilful Defaulters & Writing Off NPAs

28.10

What is Restructuring?

Restructuring occurs when a lender — for economic or legal reasons related to the borrower's financial difficulty — grants a concession the lender would not otherwise consider. It is a modification, not a write-off. Examples include:

→Extending the repayment period or reducing EMI amounts
→Reducing the interest rate (a "sacrifice" in present value terms)
→Converting outstanding principal into a term loan (FITL — Funded Interest Term Loan)
→Sanctioning additional credit to help the borrower cure the default
→Converting debt into equity in the borrower entity
→Compromise settlements where the payment timeline exceeds three months

⚠️ Asset Classification on Restructuring

A Standard account being restructured is downgraded to Substandard the moment restructuring is implemented. An existing NPA continues at its current classification (or worse). Upgrade back to Standard is possible only after a "specified period" (one year from the date the first payment falls due post-restructuring) with demonstrated satisfactory performance.

Restructuring for accounts with aggregate lender exposure ≥ ₹100 crore requires an Independent Credit Evaluation (ICE) by an authorised Credit Rating Agency (CRA).

Borrowers who have committed fraud, malfeasance, or willful default are not eligible for restructuring — unless the existing promoters/management are completely replaced by new owners and the company is fully delinked from the former management.

28.11.1

Wilful Defaulters & Non-Cooperative Borrowers — Accelerated Provisioning

Banks must apply higher provisioning rates for companies whose directors appear more than once in the wilful defaulter list (excluding nominee directors of government/FIs).

Classification	Period as NPA	Regular Rate	Accelerated Rate
Substandard	Up to 6 months	25% (or 20% infra)	25%
Substandard	6 months to 1 year	25% (or 20% infra)	40%
Doubtful I	2nd year	25% secured / 100% unsecured	40% secured / 100% unsecured
Doubtful II	3rd & 4th year	40% secured / 100% unsecured	100% (both secured & unsecured)
Doubtful III	5th year onwards	100%	100%

→Standard accounts of wilful defaulter-linked companies attract 5% provision

→No additional credit facilities may be granted to entities on the wilful defaulter list

→Banks may classify unreasonable and uncooperative borrowers as "non-cooperative borrowers" and report them to CRILC — after giving due notice

Writing Off NPAs (28.7)

→Banks must exhaust all available recovery avenues before writing off any account fully or partially.
→Write-offs can be done at Head Office level even if the advance still appears in the branch books — this is called a 'technical write-off.' The account remains outstanding at the branch, but HO has zeroed out its portion in the books.
→Full provision must be in place before a write-off can be executed.
→Under the Income Tax Act 1961, amounts set aside as provisions for NPAs are NOT eligible for tax deductions — only the actual write-off gives tax relief.
→Banks must disclose full details of write-offs (including technical write-offs separately) in their annual financial statements.
→Any recovery made in written-off accounts must be offered for tax purposes as per applicable rules.

Country Risk Provisioning (from March 31, 2003)

Risk Category	ECGC Classification	Provision Rate
Insignificant	A1	0.25 %
Low	A2	0.25 %
Moderate	B1	5 %
High	B2	20 %
Very High	C1	25 %
Restricted	C2	100 %

No provision needed for "home country" exposure (i.e., exposures to India). Short-term exposures (contractual maturity < 180 days) require only 25% of the applicable provision rate.

✅ Board Oversight & Credit Risk Management

→Board of Directors must review the NPA picture regularly and put in place measures to arrest deterioration in asset quality.
→Banks must conduct independent, objective credit appraisals — not rely on in-house consultants hired by the borrower.
→For infrastructure projects: sensitivity tests and scenario analysis (project delays, cost overruns) are mandatory.
→Lenders must check that equity infused by promoters into subsidiaries/SPVs is genuine equity — not debt being disguised. Multiple leveraging hides true debt-equity ratios.
→Director Identification Number (DIN) must be included in data submitted to RBI/CICs to accurately identify and track directors across entities.
→All security interests created by borrowers must be registered with CERSAI — a secured creditor cannot enforce security unless it is registered.
→Boards of banks should review wilful defaulter and non-cooperative borrower classifications at least half-yearly.

Revision

Quick-Fire Revision — Common Exam Questions

Q: When does a term loan become NPA?

A: After interest/principal remains overdue for more than 90 days.

Q: What are the three NPA asset categories?

A: Substandard (≤12 months), Doubtful (>12 months as sub-std), Loss (identified but not written off).

Q: Provision on a 2-year-old doubtful asset (secured portion)?

A: 40% on secured; 100% on unsecured.

Q: Provision on a 4-year-old doubtful asset?

A: 100% on both secured and unsecured.

Q: Standard asset provision rate for agriculture and SME?

A: 0.25% on outstanding funded amount.

Q: What is the PCR benchmark?

A: 70% — with reference to gross NPA as on 30 September 2010.

Q: SMA-2 overdue range for term loans?

A: 61–90 days. At 91 days, it becomes NPA.

Q: How long do lenders have to implement a Resolution Plan?

A: 180 days from the end of the 30-day Review Period.

Q: Additional provision if RP not implemented in time?

A: 20% of total outstanding (funded + non-funded).

Q: Can restructuring help a wilful defaulter?

A: No — unless the old promoters are fully replaced and the company is delinked from them.

Non-Performing Assets / Stressed Assets

What Makes a Loan Non-Performing? The IRAC Definition

"Out of Order" — Three Conditions for OD/CC Accounts

Three Grades of NPA — Asset Classification

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