Non-Performing Assets (NPA) – A Sinking Ship

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A Non-Performing Asset (hereinafter referred to as NPA) is another name for what accountants refer to as “bad debts.” An understanding of a little bit of accountancy knowledge helps in bringing clarity on the complex issue of NPA, which is as follows – when anyone borrows money from the bank, it is written on their liability side of the balance sheet, because of the factor of repayment involved. But for the bank, every loan lent is an asset. The inability of the borrower to repay the money would make such an asset a non-performing one, and hence the term came into fruition. This term has been defined in Section 2(o) of the Securities and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (hereinafter referred to as “SARFAESI Act”). The important parameters of the definition are as follows:

  • either an asset or an account of the borrower
  • which has been classified by a bank or a financial institution 
  • sub-standard, doubtful, or loss assets
    • in case such bank or financial institution is administered or regulated by any authority or body established, constituted, or appointed by any law for the time being in force, 
    • in accordance with the directions or guidelines relating to assets classification issued by such authority or body
    • In any other case, in accordance with the directions or guidelines relating to assets classifications issued by the Reserve Bank

According to the RBI, the loans where the borrower had not paid either or both the principal amount and the interest amount for more than 90 days after the end of any particular quarter would be considered to be NPA. The afore-mentioned definition has three important terms – one, sub-standard asset, two, doubtful asset, and three, loss asset. The meanings of these terms are given below:

  • Sub-standard Asset – Assets that have remained NPA for a period of less than or equal to 12 months.
  • Doubtful Asset – A substandard asset, which has been so for 12 months.

Legislative Measures for resolving NPA


There have been various legislative and executive measures to combat this problem. They are;

  • Corporate Debt Restructuring (hereinafter referred to as “CDR”) in 2005 – As is clear from the term, this is an attempt to make it easier for the corporates to repay the principal money as well as payback their interests. The objective of such an initiative was to preserve viable corporates and provide the creditors and other relevant stakeholders of such corporates a mechanism to minimize their losses in an orderly manner. The legal mechanism of the same would be provided by the two agreements primarily – The Debtor-Creditor Agreement (hereinafter referred to as “DCA”) and the Inter Creditor Agreement(hereinafter referred to as “ICA”). This system was to have a three-tiered structure – one, CDR Standing Forum, two, CDR Empowered Group, and three CDR Cell. The CDR Standing Forum is the representative self-empowered body of all the banks and financial institutions that participate in this system. It has the powers to lay down rules and guidelines as and when necessary and also to monitor and guide the process of the same. The CDR Empowered Group is the forum where the viability and the rehabilitation of the corporate would be examined and such a package would have to be placed before the company within 90 days. The CDR Cell would make the preliminary investigation into the affairs of the company and based on the report of the Cell the CDR Empowered Group would decide on the course of action.
  • 5:25 Rule in 2014 – This is the popular name by which the RBI Circular is referred to, but it is actually titled “Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries,” which was released on the 15th of July, 2014. This circular was applicable for all scheduled commercial banks who were involved in the ‘infrastructure’ and ‘core’ industries, and provide them long term flexible structuring plans. The applicability was also extended to Non-Banking Financial Corporations later. This circular was made applicable prospectively, but later retrospective was also added for the scope was extended to existing loans where the aggregate exposure to all institutional lenders exceeded INR 250 crores.
  • Joint Lenders Forum in 2014 – According to this circular of the RBI, the banks are to categorize their lenders (prior to the lenders’ accounts turning to NPA) into three categories within the Special Mention Account (hereinafter referred to as “SMA”) – one, SMA-0 (principal or interest payment overdue for 30 days and the account showing incipient strass), two, SMA-1 (principal or interest payment overdue for 31 to 60 days), and three SMA-2 (principal or interest payment overdue for 61 to 90 days). Upon any account being reported to be categorized as under SMA-2, the banks are to form a Joint Lender Foundation (hereinafter referred to as “JLF”) upon the condition that the aggregate base, including fund and non-fund based together, exceeds INR 1000 million. The JLF can be formed if the pecuniary limit is not satisfied as well, upon the prerogative of the lenders. The broad rules for incorporation of the functioning of the JLF would be specified in an agreement called the JLF Agreement, whose clauses can be taken from the master JLF Agreement prepared by the Indian Banks’ Association. The entire objective of the same is to set the irregularities or weaknesses in the account of the borrower straight. For accounts that do not follow the threshold limit set, the situation has to be monitored and any corrective action would have to be taken as soon as possible. A Corrective Action Plan (hereinafter referred to as “CAP”) would have to be used by JLF for preserving the underlying value of the assets and to arrive at an early and feasible solution with regard to the lenders’ loans. 3 options under CAP are – rectification (obtain a commitment from the borrower that the account would be regularised so that it does not slip into the NPA category), restructuring (if it can be proved beyond reasonable doubt that the defaulter is not a wilful one, then this route is considered, where the lenders and borrowers would have to sign two agreements – a Debtor-Creditor Agreement and the Inter Creditor Agreement, which would provide for the legal basis on the restructuring process), and recovery (if the first two options are not satisfactory, this option is resorted to).
  • Mission Indradhanush in 2015 – This plan was announced with an intention to revamp the Public Sector Banks (hereinafter referred to as “PSB”) in 2015. This plan had envisioned a 7 parameter growth –
    • Appointments: Appoint the best possible people as Chairman, Managing Director, and CEO as per the laws.
    • Bank Board Bureau: This Board will replace the existing Appointments Board to select the candidates for the Whole Time Directors post and the non-executive directors of PSBs.
    •  Capitalization: A total capital requirement of 1,80,000 crores was encapsulated, of which the Government of India would provide INR 70,000 crores, and the rest would be raised through equity. A four-year time frame was given for this segment to be implemented.
    • Destressing: The PSBs were to be destressed, all the while strengthening risk control measures and NPA disclosure.
    •  Employment: This will take place without interference from the Government.
    • Framework of Accountability: New Key Performance Indicators would be created and the PSBs would have to work towards fulfilling those parameters.
    • Governance Reforms: certain boards and committees would be set up for smoothening the governance process, such as the Bank Board Bureau for appointments, and the Gyan Sangh as the conclave of PSBs.
  • 5. Strategic Debt Restructuring in 2015 – This Circular was in line with that of CDR and JLF ideas. The entire basis of this was to be able to convert the debt of a corporation into equity shares. The JLF must incorporate in the restructured loans an option of the entire loan amount being converted into equity shares in the event of the other restructuring provisions not being viable. Two components of the Strategic Debt Restructuring (hereinafter referred to as “SDR”) must also be checked – the approvals under SDR being sought for, and the viability of resorting to SDR.SDR can be invoked on either the entire loan amount or partial loan amount. This decision must be taken as early as possible but within 30 days of the review of the account. Within 90 days of agreeing to opt for SDR, the JLF must approve the SDR conversion package. The SDR would always have to work out in such a way that the JLF owns at least 51% of the equity share capital of the company.
  • Sustainable Structuring of Stressed Assets in 2016 – This is an optional framework, for largely stressed accounts. The entire procedure entails identifying a stressed borrower, determining his level of sustainable debt, and also equity/ quasi-equity instruments on which there are expectations to provide an upside to the borrower as and when he can turn around.
  • Insolvency & Bankruptcy Code, 2016 – This Code is for all insolvent bodies – companies, partnerships, individuals, and is a uniform and comprehensive legislation on the same. It aims at being the one legislation that would deal with all matters regarding default of loans. As it is a relatively recent piece of legislation, there are various decisions of the SC in this regard, that help to improve the current functioning of the banks and make the process smoother and better for both the lenders and the borrowers. A corporate who is considered to be insolvent according to this Act can opt for either of the two mechanisms prescribed under the Code – the Insolvency Resolution Process (a process of judging the viability of the business in question) or Liquidation (if the Insolvency Resolution Process is deemed to fail). The minimum default amount is INR 1000 for the Code to be made applicable to unlimited partnerships and individuals. Two processes are stated here – an automatic fresh start and insolvency resolution. Under the first procedure, certain debts can be discharged upon the decision of the Debt Recovery Tribunal, depending on the income of the debtor. The second procedure entails creating a repayment plan for the borrower for which the approval of the creditors will be sought. Upon approval, the plan is binding on both the debtor and the creditor.
  • Economic Survey 2016-17 – This survey provided two solutions for tackling the problem of NPA – Bad Banks and Asset Rehabilitation Company (hereinafter referred to as “ARC”). There is a difference of opinion on how these ARCs would come into existence, that is, would it be completely funded by the government as stated in the Survey, or would it be completely privately funded as per the then RBI Deputy Governor. The Bad Banks are some such that all the problematic loans would be bought by this bank for cheap rates from the established commercial banks, and then the recovery of the loan would be taken care of by this bad bank.
  • RBI Notification in 2018 – A revised master framework on stressed assets was floated by the RBI in February 2018. This was because the RBI wanted one uniform Circular on the matter of resolution of stressed assets. The pecuniary limit of this Notification was stressed accounts that were over INR 2000 crores and this was to be finalized in 180 days. This circular was quite strict in its terms, for it stated that a stressed asset was one that defaulted the payment even a day later. This Notification was brought into effect to stop the process of ever-greening of bad loans (providing fresh loans to enable repayment of past loans in a timely fashion) that were practiced by the banks otherwise.
  • RBI’s Revised Stressed Asset Resolution Norms in 2019 –This new circular relaxed certain of the stringent requirements placed by the afore-mentioned 2018 Notification. The scope of the Circular was extended to include NBFCs as well, and not only banks, all collectively referred to as lenders. The one-day default rule was scrapped, and the lenders were given a period of 30 days to review the default, in which time frame a resolution strategy and the implementation approach was envisaged. It also allowed for the lenders to opt for legal mechanisms for recovery of the sum paid. All lenders were to enter into an ICA and any decision agreed to by 75% of the amount of loan lent by the lenders and 60% of the number of lenders was considered to be binding.


This is the entire legislative analysis of the resolution of NPA, which is very much required in the current times, particularly because of the large number of wilful defaulters that the country has seen in the recent past. The measures introduced have been something to consider, for they are quite practical in the present scenario. The Indian NPA stood at 8.2% in March 2021. Thus the potentiality of this crisis is evident from this. The recurring problem in India seems to be that of implementation, which if solved, India would have a robust NPA resolution system, which would even have to tackle a lesser number of cases in this sector, for there would be steps to nip the problem in the bud and even prevent the issue from arising in the distant future.