Key Terms & Concepts — UPSC Mains
Non-Performing Assets (NPA)
"Bank loans or advances where the principal or interest payment is overdue for more than 90 days, indicating the borrower has defaulted — a key indicator of banking sector health."
A Non-Performing Asset (NPA) is a loan or advance where the principal or interest payment is overdue for more than 90 consecutive days (for term loans) or where a cash credit account remains out of order for more than 90 days. The Reserve Bank of India's prudential norms classify NPAs into three sub-categories: Sub-Standard Assets (NPA for up to 12 months); Doubtful Assets (sub-standard for more than 12 months, with further sub-classification at 12-36 months and beyond 36 months); and Loss Assets (where a loss has been identified by the bank, auditor, or RBI inspector — the loan is uncollectable and its continuance as a bankable asset is not warranted). Gross NPA (GNPA) is the total of all NPAs before deducting specific provisions made against them. Net NPA (NNPA) = Gross NPA - Provisions made for NPAs. The NPA ratio (GNPA as % of total advances) is a critical measure of banking system health. India faced a severe NPA crisis between 2015 and 2019, primarily in the public sector banking (PSB) space. Gross NPAs of scheduled commercial banks peaked at approximately Rs 10.36 lakh crore (~11.2% of total advances) by March 2018, largely due to over-leveraged infrastructure and steel sector loans from the 2008-2011 credit boom era. The government's response included: the Insolvency and Bankruptcy Code (IBC) 2016 for time-bound resolution; NARCL (National Asset Reconstruction Company Limited) — India's first government-owned 'Bad Bank' — to take over and resolve the most stressed NPAs; and bank recapitalisation of Rs 3.5 lakh crore for PSBs.
Important for UPSC GS3 Economy on banking, financial stability, and fiscal policy. Prelims: Gross NPA vs Net NPA; sub-classification (sub-standard, doubtful, loss); 90-day rule. Mains: causes of NPA crisis (twin balance sheet problem — over-leveraged corporates + stressed banks), resolution mechanisms (IBC, ARCs, bad bank), and impact (credit crunch, crowding out of private investment, fiscal cost of recapitalisation). Basel III norms: banks must maintain minimum capital ratios — NPA provisioning reduces capital. RBI's Prompt Corrective Action (PCA) framework: triggers for banks with high NPA ratios.
- 1 NPA: loan overdue more than 90 days for term loans; out-of-order for 90 days for cash credit
- 2 Sub-categories: Sub-Standard (< 12 months NPA), Doubtful (12-36+ months), Loss (uncollectable)
- 3 Gross NPA vs Net NPA: GNPA - Provisions = NNPA
- 4 India's NPA peak: ~Rs 10.36 lakh crore (11.2% of advances) by March 2018
- 5 IBC 2016: Insolvency and Bankruptcy Code — time-bound NPA resolution (270 days)
- 6 NARCL: National Asset Reconstruction Company Ltd — India's 'Bad Bank'; set up 2021
- 7 Bank recapitalisation: GoI injected Rs 3.5 lakh crore into PSBs (2017-2022)
- 8 Prompt Corrective Action (PCA): RBI restricts operations of banks with high GNPA ratios
The collapse of large steel companies like Essar Steel and Bhushan Steel created NPAs worth tens of thousands of crores in PSB books. The Insolvency and Bankruptcy Code enabled resolution: Essar Steel was acquired by ArcelorMittal (2019) after a lengthy NCLT process, recovering ~Rs 42,000 crore for lenders — one of the largest IBC resolutions in India.