{"id":13973,"date":"2026-05-27T07:33:37","date_gmt":"2026-05-27T07:33:37","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/npa-classification\/"},"modified":"2026-05-27T07:33:37","modified_gmt":"2026-05-27T07:33:37","slug":"npa-classification","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/npa-classification\/","title":{"rendered":"NPA Classification: How Loans Are Categorised"},"content":{"rendered":"<h1 id=\"npa-classification-a-practical-guide\">NPA Classification: A Practical Guide<\/h1>\n<p>A Non-Performing Asset (NPA) is a loan where the borrower has missed payments for 90 days or more. Banks classify NPAs into categories based on how long they have been overdue. Indian borrowers and investors should understand NPA classification.<\/p>\n<p>This guide explains how NPA Classification works.<\/p>\n<h2 id=\"what-is-an-npa\">What Is an NPA?<\/h2>\n<p>An NPA is a loan or advance:<\/p>\n<ul>\n<li>Where principal or interest is overdue for 90 days<\/li>\n<li>Or where the credit account is irregular<\/li>\n<\/ul>\n<p>The 90-day rule is based on RBI guidelines.<\/p>\n<h2 id=\"npa-classification-categories\">NPA Classification Categories<\/h2>\n<p>NPAs fall into three main categories:<\/p>\n<h3 id=\"substandard-asset\">Substandard Asset<\/h3>\n<ul>\n<li>Overdue for less than 12 months<\/li>\n<li>Carries some loss risk<\/li>\n<\/ul>\n<h3 id=\"doubtful-asset\">Doubtful Asset<\/h3>\n<ul>\n<li>Overdue between 12 months and 3 years<\/li>\n<li>Higher risk of loss<\/li>\n<\/ul>\n<h3 id=\"loss-asset\">Loss Asset<\/h3>\n<ul>\n<li>Loss has been identified<\/li>\n<li>Lender expects very little recovery<\/li>\n<\/ul>\n<p>The classification gets stricter with time.<\/p>\n<h2 id=\"why-npa-classification-matters\">Why NPA Classification Matters<\/h2>\n<p>The classification matters for three reasons:<\/p>\n<ol>\n<li>It tracks loan health<\/li>\n<li>It triggers different provisioning by banks<\/li>\n<li>It guides recovery action<\/li>\n<\/ol>\n<p>A clean classification supports financial discipline.<\/p>\n<h2 id=\"how-npas-affect-borrowers\">How NPAs Affect Borrowers<\/h2>\n<p>For borrowers, NPA status:<\/p>\n<ul>\n<li>Hurts credit score<\/li>\n<li>Limits future borrowing<\/li>\n<li>May lead to recovery action<\/li>\n<li>Damages financial reputation<\/li>\n<\/ul>\n<p>Avoid NPA status by paying on time.<\/p>\n<h2 id=\"how-npas-affect-banks\">How NPAs Affect Banks<\/h2>\n<p>For banks, NPAs:<\/p>\n<ul>\n<li>Reduce profits<\/li>\n<li>Require provisioning<\/li>\n<li>Tie up capital<\/li>\n<li>Limit new lending<\/li>\n<\/ul>\n<p>This affects overall economy.<\/p>\n<h2 id=\"rbi-rules-on-npa\">RBI Rules on NPA<\/h2>\n<p>RBI requires banks to:<\/p>\n<ul>\n<li>Classify NPAs strictly<\/li>\n<li>Make provisions based on category<\/li>\n<li>Report NPAs publicly<\/li>\n<li>Recover or write off NPAs over time<\/li>\n<\/ul>\n<p>These rules ensure transparency.<\/p>\n<h2 id=\"gross-npa-vs-net-npa\"><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/gross-npa\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Gross NPA<\/a> vs <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/net-npa\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Net NPA<\/a><\/h2>\n<p>The two differ:<\/p>\n<ul>\n<li>Gross NPA: total non-performing loans<\/li>\n<li>Net NPA: gross NPA minus provisions made<\/li>\n<\/ul>\n<p>Net NPA shows what banks still need to recover or write off.<\/p>\n<h2 id=\"provisioning-for-npas\">Provisioning for NPAs<\/h2>\n<p>Banks must set aside money based on:<\/p>\n<ul>\n<li>Substandard: 10 to 15 percent<\/li>\n<li>Doubtful: 25 to 100 percent based on age<\/li>\n<li>Loss: 100 percent<\/li>\n<\/ul>\n<p>This impacts bank profits.<\/p>\n<h2 id=\"how-npas-form\">How NPAs Form<\/h2>\n<p>NPAs arise from:<\/p>\n<ul>\n<li>Borrower defaults<\/li>\n<li>Business failures<\/li>\n<li>Job losses<\/li>\n<li><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/sector\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Sector<\/a> downturns<\/li>\n<li>Wilful defaulters<\/li>\n<\/ul>\n<p>Early action prevents NPAs.<\/p>\n<h2 id=\"npa-and-credit-score\">NPA and Credit Score<\/h2>\n<p>NPA status:<\/p>\n<ul>\n<li>Drops CIBIL score severely<\/li>\n<li>Stays on report for years<\/li>\n<li>Limits future credit<\/li>\n<li>Affects family member co-applicants<\/li>\n<\/ul>\n<p>Recovery takes time.<\/p>\n<h2 id=\"common-mistakes\">Common Mistakes<\/h2>\n<p>Borrowers often:<\/p>\n<ul>\n<li>Ignore missed payments<\/li>\n<li>Hide problems from lenders<\/li>\n<li>Try to clear old loans with new loans<\/li>\n<li>Skip restructuring talks<\/li>\n<\/ul>\n<p>A clean respo<a class=\"glossaryLink\"  href=\"https:\/\/lemonn.co.in\/blog\/glossary\/nse\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'  tabindex='0' role='link'>nse<\/a> helps.<\/p>\n<h2 id=\"tips-to-avoid-npa-status\">Tips to Avoid NPA Status<\/h2>\n<p>A few habits help:<\/p>\n<ol>\n<li>Pay EMIs on time<\/li>\n<li>Build an <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/emergency-fund\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">emergency fund<\/a><\/li>\n<li>Communicate with lenders early<\/li>\n<li>Avoid over-borrowing<\/li>\n<li>Restructure if needed<\/li>\n<\/ol>\n<h2 id=\"npa-recovery-options\">NPA Recovery Options<\/h2>\n<p>Lenders use:<\/p>\n<ul>\n<li>Personal contact and reminders<\/li>\n<li>Recovery agents (under RBI rules)<\/li>\n<li><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/sarfaesi-act\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">SARFAESI Act<\/a> for secured loans<\/li>\n<li>Debt Recovery Tribunals (DRT)<\/li>\n<li>One-time settlements<\/li>\n<\/ul>\n<p>Each has its own process.<\/p>\n<h2 id=\"sarfaesi-act-and-npas\">SARFAESI Act and NPAs<\/h2>\n<p>The SARFAESI Act allows:<\/p>\n<ul>\n<li>Banks to take possession of secured <a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/assets\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">assets<\/a> without court<\/li>\n<li>Auctioning to recover dues<\/li>\n<li>Faster action for housing loans<\/li>\n<\/ul>\n<p>This protects bank interests.<\/p>\n<h2 id=\"npa-and-one-time-settlement\">NPA and One-Time Settlement<\/h2>\n<p>A one-time settlement:<\/p>\n<ul>\n<li>Closes the loan with a reduced payment<\/li>\n<li>Marks the account as &#x201C;settled&#x201D; (not &#x201C;closed&#x201D;)<\/li>\n<li>Hurts credit score but better than default<\/li>\n<\/ul>\n<p>It is a last resort.<\/p>\n<h2 id=\"npa-and-loan-restructuring\">NPA and Loan Restructuring<\/h2>\n<p>Restructuring options:<\/p>\n<ul>\n<li>Extend tenure<\/li>\n<li>Lower EMIs<\/li>\n<li>Reduce interest rate<\/li>\n<li>Convert to a different loan type<\/li>\n<\/ul>\n<p>These are alternatives to NPA classification.<\/p>\n<h2 id=\"npa-statistics-in-india\">NPA Statistics in India<\/h2>\n<p>Indian bank NPAs have fallen in recent years due to:<\/p>\n<ul>\n<li><a class=\"glossaryLink\" href=\"https:\/\/lemonn.co.in\/blog\/glossary\/insolvency-and-bankruptcy-code\/\" data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]' tabindex=\"0\" role=\"link\">Insolvency and Bankruptcy Code<\/a><\/li>\n<li>Better credit assessment<\/li>\n<li>Strong recovery action<\/li>\n<\/ul>\n<p>But sectoral stress still exists.<\/p>\n<h2 id=\"npa-and-investors\">NPA and Investors<\/h2>\n<p>For bank investors:<\/p>\n<ul>\n<li>High NPAs reduce profits<\/li>\n<li>Provisioning hits earnings<\/li>\n<li>Stock price may fall<\/li>\n<li>Recovery is slow<\/li>\n<\/ul>\n<p>Track NPA trends before investing in banks.<\/p>\n<h2 id=\"npa-and-the-economy\">NPA and the Economy<\/h2>\n<p>High NPAs in the banking system:<\/p>\n<ul>\n<li>Slow credit growth<\/li>\n<li>Reduce investments<\/li>\n<li>Affect economic activity<\/li>\n<\/ul>\n<p>Healthy banks support healthy economies.<\/p>\n<h2 id=\"key-takeaways\">Key Takeaways<\/h2>\n<ul>\n<li>NPA is a loan overdue for 90 days<\/li>\n<li>Classified as substandard, doubtful, or loss<\/li>\n<li>Banks must provide for NPAs<\/li>\n<li>Borrowers face credit score and legal impact<\/li>\n<li>Indian borrowers should avoid NPA status<\/li>\n<\/ul>\n<p>NPA Classification reflects the health of loans. Understand it as a borrower, monitor it as an investor, and let strong repayment habits keep your loans well outside the NPA zone.<\/p>\n<h2 id=\"wilful-defaulters\">Wilful Defaulters<\/h2>\n<p>A wilful defaulter is a borrower who can pay but chooses not to. RBI maintains a list of wilful defaulters, and they face stricter rules and reputational damage.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>NPA Classification: A Practical Guide A Non-Performing Asset (NPA) is a loan where the borrower has missed payments for 90 days or more. Banks classify NPAs into categories based on how long they have been overdue. Indian borrowers and investors should understand NPA classification. This guide explains how NPA Classification works. What Is an NPA? [&#x2026;]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-13973","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Team Lemonn","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"NPA Classification: A Practical Guide A Non-Performing Asset (NPA) is a loan where the borrower has missed payments for 90 days or more. Banks classify NPAs into categories based on how long they have been overdue. Indian borrowers and investors should understand NPA classification. This guide explains how NPA Classification works. What Is an NPA?&hellip;","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/13973","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/13973\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=13973"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}