Understanding Non-Performing Asset (NPA) Norms in Banking

Non-Performing Assets (NPAs) present a significant challenge to banks and financial institutions, directly impacting their liquidity, profitability, and asset quality. To uphold stability and transparency in the banking system, the Reserve Bank of India (RBI) has established prudential norms for asset classification. This article provides an overview of NPA classification norms applicable to various asset classes, with a special emphasis on agricultural advances.

1. Definition of NPA

An asset is classified as a Non-Performing Asset (NPA) under the following circumstances:

• A term loan remains overdue for more than 90 days.
• An overdraft or cash credit (CC) account remains out of order for more than 90 days.
• A bill purchased or discounted remains overdue for more than 90 days.
• Any other dues (e.g., interest, fees, etc.) remain unpaid for more than 90 days.

For agricultural advances, NPA classification is determined based on crop seasons and repayment due dates.

2. Classification of NPAs

Banks classify NPAs into the following categories:

3. NPA Norms for Different Types of Loans

a) Term Loans

• A term loan is classified as NPA if interest or principal remains overdue for more than 90 days.

b) Overdrafts and Cash Credit (CC) Accounts

• If an account remains out of order for 90 days, it is classified as NPA.
• An account is out of order if:
• The balance exceeds the sanctioned limit for 90 days.
• There are no credits for 90 days.
• Credits are insufficient to cover the debited interest.

c) Agricultural Advances (Crop Loans)

• NPA classification is based on crop duration:
• Short-Duration Crops: The loan is classified as NPA if overdue for two crop seasons.
• Long-Duration Crops: The loan is classified as NPA if overdue for one crop season.

4. NPA Classification for Agricultural Advances - Crop-Specific Examples

5. Special Considerations for Agricultural Advances

a) Natural Calamities

• In cases of drought, floods, or other calamities, banks may reschedule loans or convert short-term loans into term loans.
• NPA classification will be determined based on the revised repayment schedule.

b) Government Relief and Restructuring

• Loans under debt relief schemes are exempted from NPA classification until relief is processed.
• Collateral-free agricultural loans up to ₹2 lakh may have special exemptions.

6. Verification of Agricultural Advances in Bank Audits

Step 1: Loan Documentation Review

• Verify loan sanction letters, KYC compliance, and loan application forms.
• Ensure land ownership documents, crop estimation reports, and Farmer Credit Cards (KCC) are available.
• Review repayment schedules based on the crop cycle.

Step 2: End-Use Verification

• Check if the loan amount was utilized for agricultural purposes (e.g., purchase of seeds, fertilizers, machinery).
• Inspect ledger accounts to track disbursement and usage.

Step 3: Overdue and Repayment Verification

• Compare repayment dates with actual payments in the loan ledger.
• Identify overdue accounts and assess early warning signals (EWS).

Step 4: NPA Classification Check as per RBI Norms

• Short-term crop loans → NPA if overdue for two crop seasons.
• Long-term and annual crops → NPA if overdue for one crop season.
• Review bank branch statements for correct classification.

Step 5: Reconciliation with Core Banking System (CBS)

• Compare manual records with system-generated NPA reports.

Step 6: Provisioning & Interest Recognition

• Ensure provisioning as per RBI norms.
• Verify whether interest is recognized correctly on performing assets.

Step 7: Physical Verification & Field Inspections

• Check crop progress reports and field visit reports.
• Ensure that the borrower is actively engaged in farming.

7. Provisioning Norms for NPAs

8. Audit Considerations for NPA Classification

Auditors must ensure the following:

1. Proper Documentation: Verify loan documents, repayment schedules, and security records.

2. Accurate Classification: Confirm correct NPA tagging based on actual recovery records.

3. Early Warning Signals: Identify accounts at risk of becoming NPAs.

4. Compliance with RBI Norms: Ensure adherence to RBI's asset classification and provisioning requirements.

Conclusion

The classification and provisioning of NPAs are critical for the financial stability of banks. While the 90-day NPA rule applies to most loans, agricultural advances have crop-season-based norms. Proper adherence to RBI and ICAI guidelines ensures transparent banking practices and financial discipline.

Disclaimer: This article is intended for educational and informational purposes only. It does not constitute legal or professional advice. Readers are advised to refer to the RBI Master Circulars, ICAI's Guidance Note on Bank Audit (2025), and applicable banking regulations before making financial or audit-related decisions. For specific cases, consult a Chartered Accountant or Banking Expert.