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? I have been reading conflicting things online and I would like to understand what Indian law actually says about this, which Act and Section applies, what the realistic timelines and costs are, and what I should be doing right now to protect my position. If the matter can be resolved without litigation I would prefer that route, but I want to know what my rights are before I agree to anything or sign any document.

MyVakeel Legal Desk · Accepted Answer

How does a bank classify a loan account as an NPA? is governed in India primarily by RBI Master Circular on Income Recognition and Asset Classification, Banking Regulation Act 1949, Section 21 and SARFAESI Act 2002, Section 13(2). The short answer is set out below, followed by the practical steps most people in this situation need to take. Read it alongside the specific provisions named, because the exact relief available to you turns on the facts you can prove on paper.

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.

What to do next: 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.

If the other side has already issued a notice, filed a case or set a deadline, treat the matter as time-sensitive — most remedies under RBI Master Circular on Income Recognition and Asset Classification carry limitation periods, and a delay you cannot explain weakens an otherwise strong case. 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 this practice area.