NPA

A Non-Performing Asset (NPA) is a classification for loans or advances where the borrower has defaulted on payments — specifically, where interest or principal payments are overdue for 90 days or more. NPAs are a critical metric for evaluating the health of banks and the broader financial system in India.

The RBI classifies NPAs into three sub-categories based on the duration of default. Sub-standard assets: NPAs for up to 12 months — the bank must provision 15% of the outstanding amount. Doubtful assets: NPAs for more than 12 months — provisioning increases to 25–100% depending on duration and security. Loss assets: loans identified as uncollectable — 100% provisioning required.

NPAs directly impact bank profitability and stock valuations. When a loan turns NPA, the bank must stop recognising interest income on it (reducing revenue) and set aside provisions from its profits (reducing net profit). A bank with a Gross NPA ratio of 5% is considered stressed, while above 10% is alarming. The Net NPA ratio (after deducting provisions) gives a clearer picture of actual risk.

India experienced a severe NPA crisis from 2015 to 2020, where Gross NPAs in the banking system peaked at approximately ₹10 lakh crore (around 11% of gross advances). Major public sector banks like Punjab National Bank, Bank of India, and Indian Overseas Bank were particularly affected. The crisis led to the RBI's Asset Quality Review (AQR) in 2015, which forced banks to recognise hidden NPAs, followed by the Insolvency and Bankruptcy Code (IBC) in 2016, which created a time-bound resolution mechanism.

For stock investors, NPA metrics are essential when evaluating banking stocks like HDFC Bank, ICICI Bank, or SBI. Key ratios to track include: Gross NPA % (gross NPAs / gross advances), Net NPA % (net NPAs / net advances), Provision Coverage Ratio (provisions / gross NPAs), and the Credit Cost (provisions as a % of average advances). Lower NPAs and higher provision coverage indicate stronger asset quality.