Difference Between Performing and Non-Performing Assets in Banking

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.

Banking Exams Free Mock Test

IBPS RRB PO Free Mock Test	IBPS PO Free Mock Test
SBI PO Free Mock Test	IBPS SO Free Mock Test
IBPS RRB Clerk Free Mock Test	IBPS Clerk Free Mock Test

Join our exclusive Telegram group, where our experts are ready to answer all your queries, guide you in banking exam preparation, and give personalised tips to boost your success. Get access to real-time solutions, expert advice, and valuable resources to improve your study journey.

FAQs