Nonperforming Assets and SARFAESI Act, 2002

NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment.

A non-performing asset (NPA) is a loan or an advance where;

[1] interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a Term loan,

[2] the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

[3] the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,(Agricultural loans)

[4] the installment of principal or interest thereon remains overdue for one crop season for long duration crops,

[5] the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

[6] Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days.


The NPAs are classified into three types—

Sub­standard Assets—

With effect from March 31, 2005, a sub­standard asset would be one, which has remained NPA for a period less than or equal to 12 months.

Doubtful Assets—

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the sub­standard category for a period of 12 months.

Loss Assets—

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Gross NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date.

Gross NPA reflects the real NPAS and the quality of the loans made by banks.

It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets.



Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.

Net NPA is obtained by reducing the provisions from Gross NPAs and shows the actual burden of banks.

Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant.

That is why the difference between gross and net NPA is quite high.


Reasons behind Non-performing Assets

[1] Lack of proper pre-enquiry by the bank for sanctioning a loan to a customer.

[2] Willful defaulter.

[3] Loans sanctioned for agriculture purposes.


SARFAESI Act, 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers Banks/Financial Institutions to recover their non-performing assets without the intervention of the Court.

The Act provides three alternative methods for recovery of non-performing assets, namely—

[1] Securitisation

[2] Asset Reconstruction

[3] Enforcement of Security without the intervention of the Court

The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac.

NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act.

The Act empowers the Bank—

[1] To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice.

[2] To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.

[3] To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.

[4] Any Security Interest created over Agricultural Land cannot be proceeded with.


A borrower/guarantor aggrieved by the action of the Bank can file an appeal with DRT (Debt Recovery tribunal) and then with DRAT (Debt Recovery Appellate Tribunal), but not with any civil court.

The borrower/guarantor has to deposit 50% of the dues before an appeal with DRAT (Debt Recovery Appellate Tribunal).

If the borrower fails to comply with the notice, the Bank may take recourse to one or more of the following measures—

[1] Take possession of the security

[2] Sale or lease or assign the right over the security

[3] Manage the same or appoint any person to manage the same