Concept 1 · free preview
Non-performing assets: the 90-day rule, SMA and asset classes
Understand
A bank's loans are its assets because they earn interest. When a borrower stops paying, the loan stops 'performing' — it no longer produces income. RBI's prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) tell banks exactly when to call a loan non-performing, so that every bank recognises bad loans in the same, objective way rather than hiding them. The core rule: a term loan becomes a non-performing asset (NPA) when interest or an instalment of principal remains overdue for more than 90 days. 'Overdue' means any amount not paid on the due date. For a cash credit or overdraft account, the test is whether the account is 'out of order' (for example, the balance stays above the sanctioned limit or drawing power continuously for 90 days). Bills purchased or discounted become NPA when overdue for more than 90 days. Agricultural loans follow crop seasons: two crop seasons overdue for short-duration crops and one crop season for long-duration crops. Before a loan turns bad, banks must flag stress as Special Mention Accounts (SMA): SMA-0 (overdue up to 30 days), SMA-1 (more than 30 and up to 60 days) and SMA-2 (more than 60 and up to 90 days). For cash credit and overdraft accounts only SMA-1 and SMA-2 apply. Once an account is an NPA, it moves through three classes by age: Sub-standard (NPA for up to 12 months), Doubtful (after remaining sub-standard for 12 months) and Loss (loss identified by the bank, auditors or RBI but not yet fully written off). Classification is borrower-wise: if one facility of a borrower is an NPA, all facilities of that borrower are NPAs. Interest on an NPA is not booked as income until it is actually received. An NPA can be upgraded to standard only when the borrower pays all arrears of interest and principal.
Rule
Term loan: NPA when interest or principal is overdue for more than 90 days.
CC/OD: NPA when the account remains 'out of order' for 90 days.
Agriculture: two crop seasons overdue (short-duration crops), one crop season (long-duration crops).
SMA-0: up to 30 days; SMA-1: more than 30 up to 60 days; SMA-2: more than 60 up to 90 days.
Asset classes: Standard → Sub-standard (NPA ≤ 12 months) → Doubtful (sub-standard for 12 months) → Loss.
Borrower-wise classification; income on NPAs is recognised only on actual receipt.
Upgrade to standard only after all arrears of interest and principal are paid.
Gross NPA = total NPAs before provisions; Net NPA = gross NPA minus provisions held.
Current position
RBI's Report on Trend and Progress of Banking (December 29, 2025) put the gross NPA ratio of scheduled commercial banks at 2.2% at end-March 2025 (a multi-decadal low), and gross and net NPA ratios at 2.1% and 0.5% at end-September 2025.
Effective: Sep 2025Source (opens in a new tab)
Example
Ramesh has a ₹10 lakh term loan with an EMI due on the 5th of every month. He misses the EMI due on January 5. On January 20 the account is SMA-0, in mid-February SMA-1 and from early March (more than 60 days) SMA-2. If the January dues are still unpaid when they have been overdue for more than 90 days (early April), the loan becomes an NPA (sub-standard). If it stays unpaid for another 12 months, it becomes doubtful.
| Category | Condition |
|---|---|
| SMA-0 | Overdue up to 30 days |
| SMA-1 | Overdue more than 30, up to 60 days |
| SMA-2 | Overdue more than 60, up to 90 days |
| Sub-standard | NPA for up to 12 months |
| Doubtful | Sub-standard for 12 months |
| Loss | Loss identified, not fully written off |
Common mistake
The rule is 'MORE THAN 90 days' overdue — a loan overdue exactly 90 days is still SMA-2.
SMA accounts are still STANDARD assets; SMA is an early-warning tag, not an NPA class.
Partial payment does not upgrade an NPA — all arrears must be cleared.
Classification is by borrower, not by facility: one NPA facility drags all of the borrower's loans into NPA.
A loss asset is one identified as a loss but not yet written off; writing off does not wipe out the borrower's liability.