How Banks Classify Loans as NPAs — The 90-Day Rule Explained

The moment a loan payment goes 90 days overdue in India, the bank is legally required to classify it as a Non-Performing Asset (NPA). That single classification triggers a cascade of regulatory requirements, forced provisions, and consequences for both the borrower's credit profile and the bank's balance sheet.

Here is how the NPA classification process works and why the 90-day rule matters more than most borrowers realize.

What Is a Non-Performing Asset

The Basic Definition

An NPA is a loan or advance where the borrower has stopped making principal or interest payments. The Reserve Bank of India defines a loan as non-performing when interest or installment payments are overdue for more than 90 days. For agricultural loans, a different seasonal cycle applies.

The term "non-performing" means the loan is no longer generating income for the bank — the interest that should be accruing is not being paid, so the bank cannot book it as revenue.

The Three Sub-Categories of NPAs

Once classified as an NPA, the account moves through stages based on how long it has been non-performing:

• Substandard — NPA for less than 12 months. The loan is still recoverable in most cases.
• Doubtful — NPA for 12 months or more. Recovery is increasingly uncertain. The bank must provision 25 to 100 percent depending on collateral.
• Loss — The loan is identified as uncollectable by internal audit, external audit, or RBI inspection. The bank must write it off entirely against its capital.

The 90-Day Rule — How It Works Step by Step

Day 1 to 30: Overdue

When a scheduled payment is missed, the loan becomes "overdue" from the first day after the due date. At this stage, the bank may send reminders and can charge a penal interest rate, but no formal classification has occurred.

Day 31 to 89: Out of Order / Special Mention Account

If the overdue continues, the account is typically flagged in the bank's internal system as a "Special Mention Account" (SMA). Banks are required to report SMA accounts to the Central Repository of Information on Large Credits (CRILC) for large exposures. This is an early warning mechanism — the account is not yet an NPA, but it is on watch.

Day 90 and Beyond: NPA Classification

If the payment remains unpaid by day 90, the bank must formally classify the loan as an NPA as per RBI guidelines. This triggers immediate consequences:

• The bank can no longer book interest income on this loan — all future interest goes to a "suspense account" rather than the profit and loss statement
• The bank must create a provision against the loan (typically 15 percent of outstanding for a substandard NPA)
• The borrower's credit bureau record is updated — CIBIL and other bureaus will reflect the default

A single 90-day default on a home loan or personal loan can drop a borrower's CIBIL score by 50 to 100 points — and that record stays on the credit report for seven years.

What Happens After NPA Classification

For the Borrower

Once a loan is classified as an NPA, the bank may take several steps:

• Issue a legal notice and initiate recovery proceedings
• For secured loans (home, car, gold), invoke the SARFAESI Act to take possession of and sell the collateral without a court order
• For unsecured loans, file a civil suit or refer the matter to a Debt Recovery Tribunal

Settling an NPA with the bank is possible through a One-Time Settlement (OTS), but the settled status will still show on your credit report and will be viewed negatively by future lenders for several years.

For the Bank

High NPA levels constrain a bank's ability to lend. Provisions against NPAs reduce available capital, which limits how much new credit the bank can extend. This is why RBI monitors bank NPA ratios closely — a bank with a high NPA ratio may face restrictions on dividends, expansion, or new product launches.

Frequently Asked Questions about NPA classification:

Can a loan be upgraded from NPA back to standard?
Yes. If the borrower repays all overdue amounts — including any accrued interest and penalties — and the account maintains regular payments for at least one quarter after the NPA date, the bank can upgrade it back to standard classification. This does not automatically erase the credit bureau record, but it stops further deterioration.

Does the 90-day rule apply to all loans?
The 90-day rule applies to all commercial bank loans in India. Agricultural loans have a different cycle — the overdue period is linked to the harvest season or short-duration crop cycle rather than a fixed 90-day calendar window.