NPAs

Non-performing assets (NPAs) are loans or advances in which the borrower has not paid interest or principal for a specified period and are not generating income for the lender. They are identified when payments are overdue beyond a regulatory threshold, commonly 90 days, though the exact period varies by jurisdiction. NPAs are typically classified as performing assets before default, and once default occurs they may be categorized further by risk of recovery, such as substandard, doubtful, or loss, depending on local rules and time since default.

In accounting terms, banks must set aside provisions for expected loan losses, which reduces reported profitability and builds loan-loss reserves. The two common measures are the gross NPA ratio (gross NPAs to gross loans) and the net NPA ratio (net NPAs after provisioning to net loans). Higher NPAs indicate greater credit risk and can signal pressures on a bank’s balance sheet and capital adequacy.

Causes of NPAs include macroeconomic downturns, weakening borrowers’ repayment capacity, poor credit appraisal, inadequate monitoring, collateral weaknesses, and, in some cases, fraud. The impact of NPAs extends beyond individual banks, potentially affecting liquidity, credit availability, and financial stability within an economy.

Resolution and management involve efforts to recover or restructure the debt, such as collections, restructuring or rescheduling, and write-offs when recovery is deemed unlikely. Some jurisdictions employ asset-reconstruction mechanisms or “bad banks” to consolidate and resolve troubled assets, while insolvency procedures may facilitate recovery from unviable borrowers. NPAs remain a central measure of credit risk and financial health for lenders and regulators.