What Happens When a Loan Becomes an NPA

A loan account is classified as a Non-Performing Asset (NPA) when interest or principal repayment remains overdue for a period specified by RBI norms (commonly 90 days for most loan categories), signalling that the asset is no longer generating income as expected.

Sub-classification. NPAs are further categorised as sub-standard, doubtful, or loss assets based on how long they have remained non-performing, which affects the provisioning a bank must hold against the exposure.

Recovery mechanisms. Banks pursue several routes depending on the exposure size and borrower cooperation — restructuring, compromise settlements, action under SARFAESI for secured loans, filing with the DRT, or referral to the NCLT under the Insolvency and Bankruptcy Code for larger corporate exposures.

One-Time Settlement (OTS). A negotiated arrangement where the bank accepts a lump-sum amount, usually less than the full outstanding, to close the account, typically pursued when full recovery through legal channels is unlikely to be cost-effective or timely.

Borrowers facing genuine difficulty are generally better served engaging their bank early — through restructuring requests or settlement discussions — rather than waiting until the account has been escalated to formal recovery proceedings.