Non-Performing Asset (NPA)

Nonperforming Asset (NPA)

What is an NPA?

A nonperforming asset (NPA) is a loan or advance on which the borrower has stopped making scheduled payments of principal and/or interest. Loans typically become classified as nonperforming after a prolonged period of non-payment—commonly 90 days—but the specific threshold can vary by contract or regulator. A loan can also be classified as nonperforming if interest payments continue but the borrower cannot repay the principal at maturity.

Why NPAs matter

• NPAs reduce a lender’s cash flow and earnings.
• Lenders must set aside loan-loss provisions for NPAs, which lowers capital available for new lending.
• A persistent or large volume of NPAs signals financial distress and can trigger regulatory concern.

How NPAs are handled

When a loan becomes nonperforming, lenders may:
* Reclassify the loan on the balance sheet as an NPA.
* Pursue recovery through collateral liquidation, restructuring, conversion to equity, or sale of the loan to a collection agency.
* Eventually write off irrecoverable losses against earnings.

Example: A $10 million loan with monthly interest payments of $50,000 becomes nonperforming if payments are missed for 90 days. Regulators may then require the lender to categorize it as an NPA.

Common types of NPAs

While term loans are most common, other forms include:
* Overdraft and cash credit (OD/CC) accounts left “out-of-order” for more than 90 days.
* Agricultural advances with overdue installments for two crop seasons (short-duration) or one season (long-duration).
* Any account with expected payments overdue beyond the applicable 90-day threshold.

Classification and recording

Banks generally classify NPAs into three categories based on duration and recoverability:
* Substandard assets: Nonperforming for less than 12 months.
* Doubtful assets: Nonperforming for more than 12 months with uncertain recovery prospects.
* Loss assets: Loans identified as essentially uncollectible and typically written off; these have extended non-payment and negligible probability of recovery.

Recovery options

Lenders have several options to recoup losses:
* Restructuring: Modify loan terms to make repayment feasible (reduce interest, lower outstanding balance, or extend the term).
* Repossession/foreclosure: Take possession of pledged collateral and sell it to cover outstanding debt.
* Debt-to-equity conversion: Convert the loan into equity in the borrower; recovery depends on future value appreciation.
* Sale to collection agencies: Sell unsecured or unrecoverable loans at steep discounts as a last resort.

Restructuring techniques

Restructuring aims to restore repayment capacity and avoid classification as nonperforming:
* Temporary interest-rate reduction or interest-only periods.
* Principal reduction or partial forgiveness.
* Extension of the repayment schedule to lower monthly installments.

Legal considerations for repossession

Repossession and foreclosure rules vary by jurisdiction:
* Some places require formal notice to the borrower before repossession, giving time to cure the default.
* Foreclosure procedures are often more regulated and time-consuming, especially for real property.
* Lenders must follow local laws and due process to avoid legal challenges.

What is a cash credit account?

A cash credit (CC) account is short-term working capital financing for businesses that allows withdrawals up to a sanctioned limit regardless of account balance, subject to interest and usually agreed for a fixed term (commonly 12 months). If such accounts remain out-of-order for prescribed periods, they may be treated as NPAs.

Bottom line

An NPA is a loan that has fallen into arrears or default and poses both operational and regulatory challenges for lenders. Early identification and proactive measures—such as restructuring or collateral recovery—can mitigate losses. Borrowers and lenders should consult financial and legal professionals when facing potential default or recovery actions.