Non-Performing Asset (NPA)

Banks classify loans by how long payments are overdue. Once a loan crosses the threshold, it moves into the non-performing category. In India the standard test is that interest or instalments stay overdue for more than 90 days, and many other countries use a similar period, although the exact rules differ. Loans are then graded further, usually into substandard, doubtful and loss, and each grade carries a higher provision. Outside India the same idea is called a non-performing loan. The ratio of such loans to total loans is a headline measure of a bank's asset quality, and supervisors track it closely. A rising ratio eats into profit through provisions and ties up capital. Restructuring or sale to an asset reconstruction company are common ways lenders deal with the stock. Examiners check that loans are reclassified on time, since late recognition overstates profit.

Among a lender's 10,000 outstanding loans, one belongs to a manufacturer that stops paying instalments. Once the arrears pass 90 days, the bank reclassifies it as non-performing, reverses the interest it had booked but not received, and raises a provision. If the same pattern spreads across the sector, the bank's ratio of such loans rises from 3% to 6%.