How does a bank classify a loan account as an NPA?

Question

My loan EMI is overdue for 90 days and I heard my account might become an NPA. What does this classification mean for me? What I am unsure about is the procedure — where the application goes, what it costs, and how long npa classification matters usually take. A plain explanation of the steps, in order, would help more than a general answer.

MyVakeel Legal Desk · Accepted Answer

The law that applies to npa classification here is RBI Master Circular on Income Recognition and Asset Classification, Banking Regulation Act 1949, Section 21 and SARFAESI Act 2002, Section 13(2). The detail below matters, because RBI Master Circular on Income Recognition and Asset Classification draws the line differently depending on what your documents show.

As per RBI's prudential norms, a loan account is classified as a Non-Performing Asset when interest or principal remains overdue for more than 90 days for term loans, or when a cash credit account remains out of order for 90 days.

NPAs are further sub-classified into sub-standard, doubtful and loss assets depending on how long the account remains irregular, which affects the bank's provisioning requirements.

Once an account is an NPA, banks typically stop further disbursements, may report the default to credit bureaus like CIBIL, and can initiate SARFAESI action after issuing the mandatory notices.

Borrowers have the right to be informed of NPA classification and to seek restructuring under RBI's resolution framework if the account still qualifies before slipping too far into default.

Wrongful or premature NPA classification not following the 90-day rule strictly can be challenged before the DRT when SARFAESI action follows it.

In practice, in this order: 1) Request a statement of account to verify exactly when and why the account was marked NPA; 2) Approach the bank for a one-time settlement or restructuring proposal before further recovery action begins; 3) Check your CIBIL report for accuracy of the reported NPA status; 4) If SARFAESI notice follows, verify the 90-day NPA classification was correctly applied before filing objections.

Timing matters here: RBI Master Circular on Income Recognition and Asset Classification works on limitation periods, so a npa classification claim that is right on the merits can still fail if it is brought late. You can post the details on the MyVakeel forum for a practising advocate to review, or book a paid consultation with a Bar Council verified lawyer in banking law.