Bad Loans: NPA Classes, SARFAESI, IBC, Basel Norms and the Bad Bank

What Makes a Loan 'Bad'

A bank earns by lending, but a loan that stops paying turns from income into a problem. A Non-Performing Asset (NPA) is a loan whose interest or principal is overdue for more than 90 days. The 90-day rule is the single most tested number in this topic.

The NPA is an asset for the bank because the borrower owes it money, but it is called non-performing because it no longer earns.

RBI sorts loans into classes. A standard asset is one paying on time. Once a loan turns NPA it falls into one of three grades:

• ›Sub-standard: NPA for up to 12 months.
• ›Doubtful: remained sub-standard for more than 12 months.
• ›Loss: the bank or auditor has judged it as uncollectable, though it may not be written off.

Gross NPA is the total of all such loans. Net NPA = Gross NPA − provisions, because banks set aside money against expected losses.

Worked example: gross NPA ₹10 crore with ₹4 crore provisions gives net NPA ₹6 crore.

1. After how many days of non-payment of interest or principal is a loan generally classified as an NPA?

2. A loan that the bank or its auditor has identified as uncollectable is classified as a

3. Which law allows a bank to seize and sell the collateral of a defaulting borrower without approaching a court?

4. Under the Insolvency and Bankruptcy Code, 2016, which body is the adjudicating authority for corporate insolvency?

5. The Basel norms for banks are issued by the Basel Committee on Banking Supervision, which functions under the

6. A bank has gross NPAs of ₹10 crore and has made provisions of ₹4 crore against them. What is its net NPA?

7. Under the original time limit of the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution process must be completed in

8. What is the main purpose of a 'bad bank' such as India's NARCL?