Banks lend money. Borrowers must pay back the loan with interest. But sometimes they stop paying. Such a loan stops earning money for the bank. It is called a Non-Performing Asset (NPA). Too many bad loans make banks weak. So India built tools to recover money and fix stressed firms. The biggest one is the Insolvency and Bankruptcy Code, 2016 (IBC). This post explains NPAs and the IBC in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- A loan becomes an NPA when payment is overdue for more than 90 days.
- NPAs are of three types: substandard, doubtful and loss assets.
- The IBC was passed in 2016. Its regulator is the IBBI.
- Company insolvency cases go to the NCLT.
- Other recovery tools are Lok Adalats, DRTs and the SARFAESI Act.
1. What is an NPA?
For a bank, a loan is an asset. It earns interest for the bank.
When the borrower stops paying, the asset stops "performing". It becomes a Non-Performing Asset.
The RBI rule is simple. A loan becomes an NPA when its interest or principal is overdue for more than 90 days.
For farm loans, the rule is linked to crop seasons, not to 90 days. This is because farmers earn money only after the harvest.
Banks also watch loans before they turn bad. These are called Special Mention Accounts (SMA).
| Category | Overdue period |
|---|---|
| SMA-0 | Up to 30 days |
| SMA-1 | 31 to 60 days |
| SMA-2 | 61 to 90 days |
| NPA | More than 90 days |
2. Types of NPA
NPAs are graded by how long they have stayed bad.
| Type | Meaning |
|---|---|
| Substandard asset | Has been an NPA for up to 12 months |
| Doubtful asset | Has been an NPA for more than 12 months |
| Loss asset | The loan is seen as not recoverable |
Banks must keep aside money for bad loans. This is called provisioning. The older and worse the NPA, the higher the provision.
Gross NPA is the total value of bad loans. Net NPA is gross NPA minus the provisions. So net NPA is always smaller.
3. Why NPAs grew and what was done
Many big loans were given in the boom years before 2008. Later, many projects got stuck. Firms could not repay. Bank NPAs rose sharply.
The Economic Survey 2016-17 called this the twin balance sheet problem. Both the companies and the banks had weak balance sheets at the same time.
In 2015, the RBI ran an Asset Quality Review. It made banks show their hidden bad loans honestly.
The government also followed a 4R approach: Recognition, Resolution, Recapitalisation and Reforms. Under Mission Indradhanush (2015), it planned steps to strengthen public sector banks.
Later, a "bad bank" was announced in the Budget 2021-22. It is the National Asset Reconstruction Company Limited (NARCL). It takes over large bad loans from banks.
4. Tools to recover bad loans
Before the IBC, banks used these tools.
- Lok Adalats - settle small loan cases through talks.
- Debt Recovery Tribunals (DRTs) - set up under a 1993 law to recover bank dues faster.
- SARFAESI Act, 2002 - lets banks take over and sell the security (like a mortgaged property) without going to court. It also allows Asset Reconstruction Companies (ARCs), which buy bad loans from banks.
These tools helped, but cases often took years. A single, time-bound law was needed. That law is the IBC.
5. The Insolvency and Bankruptcy Code, 2016
First, two words. Insolvency means a person or firm cannot pay its debts. Bankruptcy is the legal stage that follows, when a court declares it.
The IBC was based on the work of the Bankruptcy Law Reforms Committee, headed by T.K. Viswanathan. Parliament passed it in 2016. It brought all insolvency rules into one code.
The regulator is the Insolvency and Bankruptcy Board of India (IBBI). It was set up on 1 October 2016.
| Who is in trouble | Where the case goes |
|---|---|
| Companies and LLPs | National Company Law Tribunal (NCLT) |
| Individuals and partnership firms | Debt Recovery Tribunal (DRT) |
Appeals from the NCLT go to the NCLAT. After that, the case can go to the Supreme Court.
6. How the IBC process works
For a company, the process is called the Corporate Insolvency Resolution Process (CIRP).
- A creditor, or the company itself, applies to the NCLT after a default.
- The NCLT admits the case. A moratorium starts. No one can file new recovery suits against the company during this time.
- An Insolvency Professional takes control of the company from its managers.
- A Committee of Creditors (CoC) is formed. It looks at plans to rescue the company.
- If the CoC approves a resolution plan with at least 66 percent of the vote, the NCLT can approve it.
- If no plan works, the company goes into liquidation. Its assets are sold to pay the creditors.
The process has a time limit. It is 180 days, with one extension of 90 days. A 2019 amendment set an outer limit of 330 days, including time spent in court cases.
Some other rules are often asked.
- Section 29A stops wilful defaulters and some others from buying back their own failed company.
- In 2020, the minimum default for starting a case was raised from Rs 1 lakh to Rs 1 crore.
- In 2021, a faster pre-packaged process was added for MSMEs.
7. Previous year questions
- A loan becomes an NPA when it is overdue for more than how many days? – 90 days
- What is an NPA for up to 12 months called? – Substandard asset
- An asset that has been an NPA for more than 12 months is called what? – Doubtful asset
- In which year was the Insolvency and Bankruptcy Code passed? – 2016
- What is the regulator under the IBC? – Insolvency and Bankruptcy Board of India (IBBI)
- Which body hears insolvency cases of companies under the IBC? – National Company Law Tribunal (NCLT)
- Who headed the Bankruptcy Law Reforms Committee? – T.K. Viswanathan
- What is the time limit for the corporate insolvency process, without extension? – 180 days
- Which Act allows banks to sell a mortgaged asset without going to court? – SARFAESI Act, 2002
- Which Economic Survey spoke of the twin balance sheet problem? – Economic Survey 2016-17
- Debt Recovery Tribunals were set up under a law of which year? – 1993
- Mission Indradhanush (2015) was meant for which banks? – Public sector banks
- Net NPA is equal to what? – Gross NPA minus provisions
- What is the full form of NARCL? – National Asset Reconstruction Company Limited
- An overdue period of 61 to 90 days places a loan in which category? – SMA-2
8. How to revise this topic
Start with the 90-day rule and the SMA table.
Next, learn the three NPA types: substandard, doubtful and loss.
Then make a timeline: DRT law 1993, SARFAESI 2002, AQR 2015, IBC and IBBI 2016, 330-day limit 2019, Rs 1 crore threshold 2020, pre-pack for MSMEs 2021.
Finally, learn where cases go: NCLT for companies, DRT for individuals, and NCLAT for appeals.
9. Frequently Asked Questions
What is a Non-Performing Asset?
A Non-Performing Asset is a loan on which the interest or principal has remained overdue for more than 90 days. It stops earning income for the bank.
What are the types of NPA?
There are three types. A substandard asset has been an NPA for up to 12 months. A doubtful asset has been an NPA for more than 12 months. A loss asset is a loan seen as not recoverable.
What is the Insolvency and Bankruptcy Code?
The IBC is a 2016 law that gives a single, time-bound process to deal with firms and persons who cannot pay their debts. Its regulator is the IBBI, and company cases are heard by the NCLT.
What is the difference between gross NPA and net NPA?
Gross NPA is the total value of a bank's bad loans. Net NPA is gross NPA minus the money the bank has set aside as provisions for those loans.
What is the SARFAESI Act?
The SARFAESI Act, 2002 allows banks to take over and sell the security given against a loan, such as a mortgaged property, without going to court. It also allows Asset Reconstruction Companies to buy bad loans.
For more Economy topics in simple language, see our Banking System in India, RBI and its Functions and Nationalisation of Banks posts, or browse the Economy section. Preparing for a banking exam? Start with the IBPS PO guide or join the 100 Hour GS Course.