India's banks carried Rs 4.28 lakh crore in gross NPAs at their peak in March 2018 — roughly 11.2% of all advances. Getting there took a decade of denial: loans evergreened through repeated ad-hoc renewals, interest capitalised to avoid default recognition, restructuring schemes stacked on top of restructuring schemes. Getting out took regulatory force: the June 2019 Prudential Framework that replaced every previous resolution mechanism with a single time-bound process, the Insolvency and Bankruptcy Code that gave banks a credible threat of liquidation, and the November 2025 entity-specific Resolution Directions that embedded stressed asset norms directly into every bank type's regulatory architecture.
The NPA story runs through every other topic in this series. The PMC Bank collapse was an NPA story — Rs 6,500 crore in loans classified as standard through fictitious accounts. The co-operative bank reforms were driven by NPA recognition gaps. The NBFC crisis of 2018 (IL&FS, DHFL) was about NPAs in the shadow banking system. Even the priority sector lending framework is shaped by NPAs — agricultural debt waivers are politically popular precisely because farm loans have the highest default rates.
The Recognition Problem: When Does a Loan Go Bad?
The answer seems simple — 90 days overdue. But getting Indian banking to accept that standard took twenty years.
The Narasimham Committee recommended the 90-day NPA norm in 1991. Commercial banks adopted it. But co-operative banks had 180-day norms. Agricultural loans had seasonal exceptions. Infrastructure projects got extended timelines. And banks discovered creative ways to avoid the clock: renew the loan before 90 days, capitalise the unpaid interest, restructure the terms, or — as PMC Bank demonstrated — simply create fictitious accounts to hide the exposure.
The September 2009 circular on NPA computation RBI/2009-10/168 (since withdrawn) revealed the inconsistency problem:
"Banks follow different methods to compute and report Gross and Net Advances, and Gross and Net NPAs. There is a need for uniformity across banks in reporting, so as to avoid any scope for different interpretations." Prudential Norms on Income Recognition, Asset Classification...
The August 2020 circular on ad-hoc credit reviews RBI/2020-21/27 addressed the evergreening problem directly:
"An account where the regular/ad-hoc credit limits have not been reviewed/renewed within the prescribed timeline will be treated as Non-Performing Asset." Ad-hoc/Short Review/Renewal of Credit Facilities
"Banks should avoid frequent and repeated ad-hoc/short review/renewal of credit facilities without justifiable reasons." Ad-hoc/Short Review/Renewal of Credit Facilities
The Provisioning Architecture
Once a loan is recognised as NPA, the provisioning schedule determines how much capital the bank must set aside. The June 2004 unsecured advances circular (Annual Policy Statement for the year 2004-05 - Pru) (since withdrawn) (39 downstream refs) defined "unsecured" precisely:
"'Unsecured exposure' is defined as an exposure where the realisable value of the security is not more than 10 percent, ab-initio, of the outstanding exposure." Annual Policy Statement for the year 2004-05 - Prudential Gu...
Unsecured substandard assets attract 20% provisioning (vs 10% for secured). Unsecured doubtful assets get 100%. The shift was significant: the RBI moved from a rigid 15% cap on unsecured lending to allowing boards to set their own limits — but with steeper provisioning as the price of freedom.
Floating Provisions: Locking Down the Cosmetic Tool
The June 2006 floating provisions circular RBI/2005-06/421 (since withdrawn) (31 downstream refs) cracked down on a practice that had become widespread:
"The use of floating provisions to set-off against provisions required to be made as per extant prudential guidelines appear to have been used in smoothening of profits in some cases." Prudential norms on creation and utilisation of floating pro...
"Floating provisions cannot be reversed by credit to the profit and loss account. They can be used only for contingencies under extraordinary circumstances with prior permission of RBI." Prudential norms on creation and utilisation of floating pro...
The April 2011 Provisioning Coverage Ratio RBI/2010-11/485 (since withdrawn) built the counter-cyclical buffer properly:
"A Provisioning Coverage Ratio of 70 percent of gross NPAs was prescribed, as a macro-prudential measure, with a view to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good profits." Provisioning Coverage Ratio for Advances
The June 2019 Prudential Framework: One Framework to Replace Them All
The Prudential Framework RBI/2018-19/203 (39 downstream refs) replaced CDR, SDR, S4A, JLF, and the struck-down February 2018 circular with a single framework:
SMA classification — early warning at 1 day, 31 days, and 61 days overdue. 30-day review period from first default. 180-day resolution timeline with 20% additional provisioning if breached, escalating to 35% at 365 days. Inter-Creditor Agreement requiring 75% by value. Independent Credit Evaluation for accounts above Rs 100 crore.
And the anti-evergreening warning: "Any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory/enforcement actions."
The November 2025 Consolidation
All the withdrawn circulars above — RBI_1706, RBI/2005-06/421, RBI/2009-10/168, RBI/2010-11/485 — were consolidated into entity-specific Resolution Directions. The Commercial Banks Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti) alone has 90 downstream references. The provisions survive in modified form, but the historical circulars remain the record of how each norm originated and why it was needed.
The June 2019 Prudential Framework for Resolution of Stressed Assets — which replaced the struck-down February 2018 circular and all earlier restructuring schemes — was announced alongside the framework's full text: RBI releases Prudential Framework for Resolution of Stressed Assets (PR_47248).
Last updated: April 2026