Pariksha SaathiLesson 6 of 10 · Banking and Financial Awareness
NPAs, Debt Recovery Laws, IBC and Basel Capital Norms
Drafted with AI assistance and fact-checked on 28 October 2026; not yet read line by line by a human editor. Spotted a mistake? Tell us. Editorial standards & corrections
What an NPA is
A loan becomes a non-performing asset (NPA) when it stops earning income for the bank. A term loan becomes an NPA when interest or an instalment of principal stays overdue for more than 90 days. An overdraft or cash credit account becomes an NPA when it remains out of order, and a bill purchased or discounted when it stays overdue, for more than 90 days. For farm loans the test is crop seasons: two crop seasons for short-duration crops and one for long-duration crops. The 90-day rule applies from March 2004; earlier the period was 180 days. Before a loan turns bad, banks flag stress as special mention accounts: SMA-0 when overdue up to 30 days, SMA-1 for 31 to 60 days and SMA-2 for 61 to 90 days.
Asset classification and provisioning
Banks sort loans into four groups. Standard assets are performing loans. A sub-standard asset has been an NPA for up to 12 months. A doubtful asset has stayed sub-standard for 12 months. A loss asset has been found uncollectible by the bank, its auditors or the RBI's inspectors, though not yet fully written off. Banks must set aside provisions from profits, and the provision rises as the asset ages: a small general provision on standard assets, more on sub-standard and doubtful assets, and 100 per cent on loss assets. Gross NPA is the total of bad loans; net NPA is gross NPA minus provisions.
SARFAESI Act and ARCs
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 lets banks enforce their security without going to court. Once a secured loan is an NPA, the lender serves a notice under section 13(2) giving the borrower 60 days to pay; if he does not, the lender can take possession of the secured asset, take over management or sell the asset. The borrower can appeal to the Debt Recovery Tribunal; the Act does not cover agricultural land. The same Act provides for asset reconstruction companies (ARCs), registered with the RBI under section 3, which buy bad loans from banks at a discount, usually paying partly in security receipts; ARCIL was the first.
DRTs and Lok Adalats
Debt Recovery Tribunals were set up under the Recovery of Debts Due to Banks and Financial Institutions Act 1993, renamed the Recovery of Debts and Bankruptcy Act in 2016, to decide bank recovery cases faster than civil courts. Appeals lie with the Debt Recovery Appellate Tribunals. DRTs are also the adjudicating authority for the insolvency of individuals and partnership firms under the Insolvency and Bankruptcy Code. Lok Adalats, set up under the Legal Services Authorities Act 1987, settle smaller dues by compromise between bank and borrower; their award is final, with no appeal.
Insolvency and Bankruptcy Code 2016
The IBC set up one time-bound process. When a company defaults, a financial creditor, an operational creditor or the company itself can apply to the National Company Law Tribunal (NCLT), the adjudicating authority for companies and limited liability partnerships. Once a case is admitted, a moratorium halts other recovery suits, an insolvency professional takes charge, and a committee of creditors made up of financial creditors considers resolution plans; a plan needs 66 per cent of their votes. The process must finish within 180 days, extendable by 90 days, and within 330 days including litigation; if no plan is approved, the company is liquidated. The Insolvency and Bankruptcy Board of India (IBBI), set up on 1 October 2016, regulates the process, and appeals against NCLT orders go to the NCLAT.
Basel norms and capital
The Basel Committee on Banking Supervision, set up in 1974 by the central banks of the G10 countries and housed at the Bank for International Settlements in Basel, Switzerland, issues global standards for bank capital. Capital matters because it absorbs losses before depositors suffer. The capital to risk-weighted assets ratio (CRAR) compares capital with assets weighted by risk: a government security carries little or no weight, an unsecured loan a high one. Tier 1 capital is core capital such as equity and disclosed reserves; Tier 2 is supplementary capital such as subordinated debt and general provisions. Basel I (1988) covered credit risk and set a minimum CRAR of 8 per cent; India adopted it from 1992 on the Narasimham Committee's advice, and the RBI later raised India's minimum to 9 per cent. Basel II (2004) covered credit, market and operational risk and rested on three pillars: minimum capital, supervisory review and market discipline. Basel III (2010), framed after the 2008 global financial crisis, demands more and better capital, especially common equity, a capital conservation buffer of 2.5 per cent, a countercyclical buffer, a leverage ratio and two liquidity standards, the liquidity coverage ratio and the net stable funding ratio.
Prompt corrective action
The RBI's prompt corrective action (PCA) framework, introduced in December 2002 and revised since, lets it act early when a bank's health slips: a bank that breaches set thresholds on capital, net NPAs or leverage faces curbs on dividends, branch expansion, risky lending and management pay until it rebuilds its strength.
Key facts
- A term loan becomes an NPA when interest or principal is overdue for more than 90 days; this norm applies from March 2004 (earlier 180 days).
- Sub-standard: NPA for up to 12 months; doubtful: sub-standard for 12 months; loss: found uncollectible but not fully written off.
- Special mention accounts: SMA-0 overdue up to 30 days, SMA-1 31 to 60 days, SMA-2 61 to 90 days.
- SARFAESI Act 2002: notice under section 13(2) gives 60 days; the lender can then take possession and sell without a court; it does not apply to agricultural land.
- DRTs: Recovery of Debts Due to Banks and Financial Institutions Act 1993; Lok Adalats: Legal Services Authorities Act 1987, award final with no appeal.
- IBC 2016: NCLT for companies and LLPs, DRT for individuals and firms; process in 180 + 90 days (330 with litigation); creditors' approval 66 per cent; IBBI from 1 October 2016.
- ARCs buy NPAs at a discount against security receipts and are registered with the RBI under section 3 of the SARFAESI Act; ARCIL was the first.
- Basel I 1988 (credit risk, 8 per cent CRAR); Basel II 2004 (three pillars); Basel III 2010 (better capital, buffers, leverage and liquidity ratios); India's minimum CRAR is 9 per cent.
- Basel Committee on Banking Supervision: set up in 1974 by G10 central banks, housed at the BIS in Basel, Switzerland.
- PCA (December 2002): RBI curbs on a bank that breaches thresholds on capital, asset quality or leverage.
Quick revision
NPA = overdue more than 90 days (from March 2004, earlier 180); SMA-0/1/2 = up to 30/31-60/61-90 days; sub-standard up to 12 months, doubtful after 12 months, loss = uncollectible; SARFAESI 2002 (section 13(2) notice, 60 days, no court; ARCs under section 3); DRT Act 1993; Lok Adalat 1987; IBC 2016 (NCLT, CoC 66%, 180+90, 330 days; IBBI 1 October 2016); Basel Committee 1974; Basel I 1988 (8%), II 2004 (three pillars), III 2010 (buffers, LCR, NSFR); India CRAR 9%; PCA 2002.