Performing and Non-Performing Assets are generally asked in the Banking exams. Therefore, knowing these topics is essential for banking aspirants. The candidates must prepare such banking-related terms that can be asked in the interview as well. This blog is about the Performing and non-performing assets. Their classification and their role in the overall banking system, and how banks are required to deal with them. We are also going to cover the RBI’s guidelines for the Non-Performing Assets.
What are Performing Assets?
Performing Assets are loans or advances given by financial institutions, primarily banks, that generate regular income for the lender in the form of interest or instalments.
In other words, it is a loan or advance on which the borrower has not defaulted and is making timely principal and interest payments, typically classified as such if no payment is overdue for more than 90 days.
Example:
- A customer is paying monthly instalments on time for a housing loan.
- A business pays back the loan as agreed in the contract.
What are Non-Performing Assets?
A Non-Performing Asset (NPA) is a loan or advance given by a bank or financial institution on which the borrower has stopped making interest or principal repayments for a specified period, typically 90 days or more. In other words, it is a loan that is not generating income for the lender.
It is classified into the following three categories:
Substandard Assets
- Assets that have been classified as Non-Performing Assets for a duration of 12 months or less are referred to as Substandard Assets.
Doubtful Assets
- If the asset remains in the substandard category for a period of 12 months, it is categorized as a Doubtful Asset.
Loss Assets
- Those assets which have become uncollectible and are no longer continue as a Bankable Assets.
Example
A home loan is disbursed on March 1, 2021, with monthly EMIs due on the 5th of every month. The borrower pays regularly until February 2022, and then stops repaying.
- If no payment is made by May 5, 2022, the account is classified as an NPA.
- If the loan remains unpaid beyond May 5, 2022, it remains a sub-standard asset till May 5, 2023.
- After May 5, 2023, if no repayment is made, it is categorized as a doubtful asset.
- If the bank concludes that the loan cannot be recovered at all, it becomes a loss asset.
Difference Between Performing and Non-Performing Assets
The Performing and Non-Performing Assets are different in terms of definition, repayment status, income generation, asset quality, impact on the bank, provisioning requirement, classification, and loan monitoring. The difference between these assets based on provided features is mentioned in the table below:
| Feature | Performing Assets | Non-Performing Assets (NPAs) |
| Definition | Loans or advances that generate regular income for the bank | Loans or advances where interest or principal is overdue > 90 days |
| Repayment Status | Borrower makes timely repayments of interest and principal | Borrower has defaulted; no payment for 90 days or more |
| Income Generation | Generates regular interest income | Does not generate income; interest is not received |
| Asset Quality | Considered healthy and standard | Considered a risky or a bad asset |
| Impact on Bank | Positive impact on profit and balance sheet | Negative impact on profitability and financial health |
| Provisioning Requirement | Lower or no provisioning required | High provisioning is required as per RBI norms |
| Classification by Bank | Classified as a standard asset | Classified as sub-standard, doubtful, or loss asset |
| Loan Monitoring | Normal monitoring by the bank | Requires special attention and recovery action |
Impact of NPAs on Banks, the Economy, and Borrowers
The impact of NPAs on Banks, the Economy, and Borrowers is mentioned below in detail.
Impact on Banks
- NPAs reduce banks’ profitability as interest income is not earned on defaulted loans.
- Banks must create provisions for bad loans, lowering available capital.
- High NPAs weaken a bank’s capital adequacy ratio, requiring recapitalization.
- Lending capacity decreases as funds are tied up in non-recoverable loans.
- Leads to operational burden due to increased recovery efforts and legal costs.
- Investor and depositor confidence in the bank reduces, affecting its market performance.
Impact on the Economy
- Decline in credit availability to productive sectors like MSMEs and infrastructure.
- Results in slower economic growth due to reduced investments and industrial activity.
- Government fiscal burden increases due to the need for public sector bank recapitalization.
- Job creation suffers as industries face the credit crunch and cut back on expansion.
- Weakens the overall financial system stability, affecting trust in the banking sector.
Impact on Borrowers
- Banks adopt stricter lending norms, making it harder for genuine borrowers to get loans.
- May lead to higher interest rates to compensate for loan losses.
- Delays in loan approvals and increased documentation requirements.
Measures Taken to Curb NPAs in India
The measures taken to deal with the Non-Performing Assets in India from 1993 to 2021 are mentioned in the table provided below.
| Year | Measure | Description |
| 1993 | Debt Recovery Tribunals (DRTs) | Established for the fast-track recovery of loans through special tribunals. |
| 2000 | Credit Information Bureau (CIB) | To avoid loans getting into the wrong hands and, as a result, NPAs, a good information system is essential. |
| 2002 | SARFAESI Act | Empowered banks to seize and auction defaulters’ assets without court intervention. |
| 2002 | Prompt Corrective Action (PCA) Framework | RBI restrictions on weak banks to prevent further deterioration (e.g., lending caps, governance checks). |
| 2005 | Credit Information Companies (Regulation) Act | Enabled the creation of credit bureaus like CIBIL to monitor borrowers’ creditworthiness. |
| 2015 | Asset Quality Review (AQR) | Initiated by the RBI to uncover stressed assets hidden under restructured loans. |
| 2015 | Strategic Debt Restructuring (SDR) | Allowed banks to convert bad loans into equity and take management control of defaulting firms. |
| 2016 | Insolvency and Bankruptcy Code (IBC) | Introduced a time-bound process (180–270 days) for resolving insolvency and recovering bad loans. |
| 2016 | S4A (Scheme for Sustainable Structuring of Stressed Assets) | Aimed to restructure large corporate loans by separating sustainable and unsustainable portions. |
| 2018 | Project ‘SASHAKT’ | A 5-point strategy to resolve NPAs, including the formation of Asset Management Companies (AMCs). |
| 2019 | Merger of Public Sector Banks | Merged weaker PSBs to create stronger, more competitive banking institutions. |
| 2021 | National Asset Reconstruction Company Ltd. (NARCL) – “Bad Bank” | Set up to acquire large bad loans and relieve banks’ balance sheets. |
| 2021 | India Debt Resolution Company Ltd. (IDRCL) | Supports NARCL by managing the resolution of acquired bad loans. |
Summary
Performing Assets are loans or advances given by financial institutions, primarily banks, that generate regular income for the lender in the form of interest or instalments. A Non-Performing Asset (NPA) is a loan or advance given by a bank or financial institution on which the borrower has stopped making interest or principal repayments for a specified period, typically 90 days or more. The NPAs are classified into three categories: Substandard Assets, Doubtful Assets, and Loss Assets. The difference between PAs and NPAs and the impact of NPAs on the overall economy, and the measures to curb NPAs are discussed in the above article.
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FAQs
Performing Assets are loans or advances given by financial institutions, primarily banks, that generate regular income for the lender in the form of interest or instalments.
A home loan is disbursed on March 1, 2021, with monthly EMIs due on the 5th of every month. The borrower pays regularly until February 2022, and then stops repaying. It becomes a Non-performing asset.
Non-banking assets refer to assets that are not directly related to a bank’s core lending and deposit-taking activities and do not generate revenue for the bank.
RBI defines NPAs as any advances or loans that are overdue for more than 90 days.
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