The banking industry follows a traditional pattern of business, which majorly involves acceptance of deposits and channelizing these deposits into lending activities. The credit banks receive from the depositors, have to be repaid to them by the bank, which are called as ‘Liabilities’, whereas the loan given by the banks to the borrowers are to be taken back from them, which are termed as banks’ ‘Assets’. Hence, loans and advances given by the bank are banks’ assets.

According to the traditional banking business of lending finance using deposits of customers, banks hold the risk of default by the borrower in the repayment of either interest or principal amount. In banking terms, it is known as ‘Credit Risk’ and accounts where payments of interest or/and repayment of principal are not coming, are declared as ‘NON-PERFORMING ASSETS’. An asset means a leased asset that becomes non-performing when it stops to make revenue for the bank.

As per norms of Reserve Bank Of India, an account is classified as NPA, based on the retrieval of interest and installments on loans and advances and other aspects. The newly updated RBI norms to label the account as NPA follow RBI guidelines as mentioned below:

  • If SMEs don’t repay the installments or interest of the principal for more than 90 days in respect of a term loan
  • If the outstanding amount of SMEs remains constantly in excess of the drawing power/sanctioned limit, the account becomes ‘out of order’ in the sense of Overdraft or Cash Credit.
  • When the outstanding balance in the principal operating account of SMEs is less than the drawing power/sanctioned limit, however, there is a single credit since 90 days till the date of Balance Sheet of Credits are not sufficient to pay the interest debited in the same time, these SMEs accounts are treated as ‘out of order’!
  • In the case of derivative transactions, the outstanding receivables showing a positive mark to market value of a derivative contract, if these remain overdue for a duration of 90 days from the particular due date for payment.


SMEs opt to take a loan from the bank to see their dream of creating a business come true, however, due to certain factors the business may not be in a healthy state thereby rendering difficulty in servicing the loan which eventually leads into Non-Performing Asset account.

However, being labeled as NPA doesn’t mean a full-stop to your business; it is just a temporary phase where your business is on the backfoot. NPA Consultants Pvt. Ltd supports the SMEs to come over the risk of being NPA and guides to develop the business thoughtfully!