What is NPA

Published on May 25, 2026 | 6 min read

What is NPA, and How Does It Affect Banks?

Key Takeaways

The Reserve Bank of India (RBI) defines Non-Performing Assets as loans or advances for which payments are overdue for more than 90 days.
A missed payment doesn’t immediately turn into an NPA. Before a loan with delayed payments is determined as an NPA, banks categorise it as a Special Mention Account (SMA). SMAs are further categorised into three levels, SMA-0, SMA-1 and SMA-2.
There are different types of NPAs, such as Substandard assets, Doubtful assets, and Loss assets.
Banks set aside a portion of their profits to cover potential losses arising from NPAs; this is called NPA provisioning.
NPAs reduce a bank's profitability, liquidity, lending capacity, and stock performance. As a result, investors may sell the bank shares, which can significantly impact its stock price.

Tracking a bank’s Non-Performing Assets (NPAs) is essential for investors to determine its asset quality, profitability and liquidity. NPAs refer to loans whose payments are more than 90 days overdue. High NPAs can adversely affect a bank's profitability, liquidity, and lending capacity.

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Let’s understand in detail what NPAs are, how it works, their types and how it affects banks.

What is NPA?

The core function of a bank is to lend money to borrowers and earn interest on the loans, which serves as one of the primary sources of income. Hence, a loan is an income-generating asset for the bank while a liability to the borrower.

When borrowers miss payments or default on the loan for more than 90 days, that loan is classified as a Non-Performing Asset (NPA).

How Does NPA Work?

Since instalments on loans are one of the primary sources of income for the banks, missed payments reduce the banks' profitability and liquidity as they have to set aside a portion of the profits to cover potential losses arising from NPAs. However, a single missed instalment is not immediately flagged as an NPA. Only when the payment is overdue for more than 90 days, the loan is considered an NPA. The following is a detailed breakdown of the NPA classification process.

0-30 Days Overdue

If the loan payment is overdue by up to 30 days, the loan is considered a ‘Standard Asset’.

31-60 Days Overdue

If the loan with payments overdue by 31 to 60 days is categorised as Special Mention Account - 1 (SMA - 1).

61-90 Days Overdue

If the loan payments are overdue by 61 to 90 days, it is categorised as Special Mention Account - 2 (SMA - 2).

90+ Days Overdue

When the loan payments are pending for more than 90 days, the loan is considered an NPA.

Types of NPAs

The following are the different types of NPAs a bank may have.

Substandard Assets

Loans whose instalments are overdue for up to 12 months are categorised as Substandard assets. At this stage, the borrower's continuous missed payments indicate a higher possibility of default. Additionally, the collateral pledged against the loan is no longer sufficient to cover the outstanding dues. If the borrower defaults on the loan, the bank may incur a financial loss.

Doubtful Assets

If the loan instalments remain overdue for more than 12 months, it is classified as doubtful assets. Below 12 months, the loan is considered a substandard asset.

Loss Assets

Lost assets refer to loans with payments overdue for more than 3 years. These loans are considered either entirely uncollectable or the outstanding value is too insignificant and hence cannot be considered as an asset. These loans can either be partially recovered or completely written off by the bank.

Provision for NPA

To mitigate the impact of financial losses arising from NPAs, the banks set aside a portion of their profits to cover the losses. This helps ensure the bank’s financial stability and helps accurately account for bad loans.

The provisions for NPAs are calculated based on their type, age of default and collateral as per RBI guidelines.

NPA Type	RBI Provisioning Rate	Details & Conditions
Standard Assets	Min. 0.25%	Ranges from 0.25% to 1.00% depending on the type of loan and the category of the lending institution.
Sub-Standard Assets	15%	A flat 15% provision on the total outstanding. (Note: Unsecured exposures may attract up to 25%.)
Doubtful Assets	20% - 100%	Provision depends on the time the asset has remained in the doubtful category: • Up to 1 year: 25% of the secured portion. • 1 to 3 years: 40% of the secured portion. • More than 3 years: 100% of the secured portion. • Unsecured portion: 100% in all cases.
Loss Assets	100%	100% of the outstanding amount must be provided, or the asset should be fully written off.

Difference Between GNPA and NNPA

The RBI mandates the banks to disclose their NPA numbers to them and the general public. You will often see NPAs mentioned in the bank’s financial statements as GNPA (Gross Non-Performing Assets) and NNPA (Net Non-Performing Assets).

GNPA refers to the gross NPAs of the bank in a particular quarter or financial year and is an absolute value.

NNPA refers to the Net NPAs of the banks, which are calculated by subtracting the bank’s provisions for NPAs. NNPA is the exact value of the NPAs after accounting for provisions.

How NPA Affects Banks?

High NPAs can negatively affect a bank's profitability and liquidity. Here’s how NPAs affect the banks.

Reduced Profitability

When a borrower defaults on a loan, the bank's income reduces. This leads to reduced profitability, making provisions to cover bad loans and increased expenses towards recovery.

Reduced Liquidity

Bad loans disrupt the recycling of credit and limit the availability of credit for new borrowers.

Impact on Stock Price

Smart investors avoid investing in banks with high NPAs and may withdraw their existing investments if the bank fails to manage and reduce NPAs. This causes the bank’s stock price to decline.

Regulatory Action

When banks have high, unmanageable NPAs, they may face strict RBI restrictions such as bans on dividend payouts, restrictions on branch expansion, and mandatory changes in management.

NPAs are loans whose instalments are overdue for more than 90 days. High NPAs impact the bank’s profitability, lending capacity and stock performance. To cover the potential financial losses arising from NPAs, banks have to set aside a portion of their profits to mitigate the impact of losses.

Before investing in any bank, investors must check the bank’s GNPA (Gross Non-Performing Asset) and NNPA (Net Non-Performing Asset) to assess its financial health.

FAQs

What is the difference between Gross NPA and Net NPA?

Gross NPA is the total and absolute value of outstanding loans, while the Net NPA refers to the total value of the outstanding loans after accounting for the provisions made.

How many days of missed EMI lead to NPA classification?

When loan payments are missed for more than 90 days, it is considered an NPA.

How do NPAs impact bank profitability?

High NPAs reduce a bank's profitability, liquidity, lending capacity, attract regulatory actions and affect stock performance.

What is provisioning for NPAs in banking?

As per RBI guidelines, banks must set aside a portion of their profit to cover the financial losses arising from NPAs.

When banks disclose high NPAs in their quarterly or annual financial reports, it represents weak financial health and instability, causing investors to sell their holdings. This market response pulls down the bank’s stock price.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.