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NPA & Asset Quality

Banking / Economy Awareness · Banking System & RBI

Overview

A loan becomes a non-performing asset when repayment stops for the defined period; asset quality is tracked through NPA ratios and provisions.

Key points

A term loan becomes an NPA when interest or principal is overdue for more than 90 days.
Substandard: NPA for up to 12 months; doubtful: NPA for more than 12 months; loss: identified as uncollectible.
Gross NPA counts all NPAs; net NPA = gross NPA − provisions.
SARFAESI Act, 2002 allows banks to enforce security without court intervention.
Insolvency and Bankruptcy Code, 2016 provides time-bound resolution.

Explanation

Provision coverage ratio = provisions ÷ gross NPA.
Special mention accounts (SMA-0, 1, 2) flag stress before an account becomes an NPA.
Debt Recovery Tribunals handle large recovery cases.
A rising NPA ratio reduces a bank’s lending capacity and profits.

Step by step

Identify the institution, rule or instrument asked.
Recall its definition, year, limit or function from a table.
Eliminate options from similar institutions or older rules.

Examples

A loan becomes an NPA after overdue for more than → 90 days.
The Act allowing banks to seize secured assets without court → SARFAESI Act, 2002.
Net NPA = → gross NPA minus provisions.

Traps and advanced points

Trap: Using 60 or 180 days.
Trap: Mixing gross and net NPA.
Trap: Confusing IBC (2016) with SARFAESI (2002).

Quick revision

90 days.
Substandard ≤ 12 months.
SARFAESI 2002; IBC 2016.

Practice MCQs

Which banking/finance term is best described as: statement of revenue and expenses over a period?
1. CRR
2. simple interest
3. income statement
4. operational risk
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Answer: (c) income statement. Shows profit/loss for the reporting period.
Which term-description pair is correctly matched for the concept “IRDAI”?
1. PFRDA — Insurance Regulatory and Development Authority of India
2. MCLR — Insurance Regulatory and Development Authority of India
3. GDP — Insurance Regulatory and Development Authority of India
4. IRDAI — Insurance Regulatory and Development Authority of India
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Answer: (d) IRDAI — Insurance Regulatory and Development Authority of India. Regulator for insurance sector in India.
Which term-description pair is correctly matched for the concept “SIDBI”?
1. SIDBI — Small Industries Development Bank of India
2. EXIM Bank — Small Industries Development Bank of India
3. SIDBI — External Benchmark Linked Rate
4. deflation — Small Industries Development Bank of India
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Answer: (a) SIDBI — Small Industries Development Bank of India. Development financial institution focused on MSME sector.
Which term-description pair is correctly matched for the concept “endorsement”?
1. endorsement — ability to meet short-term obligations
2. endorsement — signing/instruction used to transfer or negotiate an instrument where legally applicable
3. liquidity — signing/instruction used to transfer or negotiate an instrument where legally applicable
4. LTV — signing/instruction used to transfer or negotiate an instrument where legally applicable
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Answer: (b) endorsement — signing/instruction used to transfer or negotiate an instrument where legally applicable. Rules depend on the type of instrument and endorsement.
Which term-description pair is correctly matched for the concept “solvency”?
1. solvency — ability to meet long-term obligations / maintain financial viability
2. LTV — ability to meet long-term obligations / maintain financial viability
3. RBI — ability to meet long-term obligations / maintain financial viability
4. solvency — Loan-to-Value ratio
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Answer: (a) solvency — ability to meet long-term obligations / maintain financial viability. A firm can be solvent yet face short-term liquidity stress.
Which term-description pair is correctly matched for the concept “NPA”?
1. NPA — Know Your Customer
2. NEFT — Non-Performing Asset
3. NPA — Non-Performing Asset
4. IMPS — Non-Performing Asset
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Answer: (c) NPA — Non-Performing Asset. NPA — Non-Performing Asset. A loan/advance that stops generating income under RBI asset-classification norms.
In banking/finance, what does “NPA” refer to most accurately?
1. Non-Performing Asset
2. ability to meet short-term obligations
3. pooled investment vehicle managed according to a stated scheme mandate
4. excess of government total expenditure over non-borrowed receipts under the budget definition
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Answer: (a) Non-Performing Asset. The correct answer is “Non-Performing Asset”. A loan/advance that stops generating income under RBI asset-classification norms.
Which banking/finance term is best described as: Non-Performing Asset?
1. NABARD
2. NPA
3. IFSC
4. DICGC
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Answer: (b) NPA. NPA — Non-Performing Asset. A loan/advance that stops generating income under RBI asset-classification norms.
A term loan becomes an NPA when dues are overdue for more than —
1. 30 days
2. 60 days
3. 90 days
4. 180 days
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Answer: (c) 90 days. 90 days.
An NPA for up to 12 months is —
1. standard
2. substandard
3. doubtful
4. loss
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Answer: (b) substandard. Substandard.