In March 2018, the gross non-performing assets of Indian banks crossed Rs 10 lakh crore — roughly 11.5% of all outstanding advances. The number was shocking, but not because the loans had suddenly gone bad. Most had been bad for years. What changed was that the RBI finally forced banks to admit it. The central question of Indian banking regulation for the previous two decades had been deceptively simple: when exactly does a loan become a non-performing asset? The answer — 90 days overdue — took twenty years, four resolution frameworks, one Supreme Court intervention, and a complete regulatory rewrite to actually enforce.
What does the 90-day rule actually say?
A loan is classified as a non-performing asset when interest or principal remains overdue for more than 90 days. The Master Circular on Income Recognition, Asset Classification and Provisioning RBI/2006-07/287 (since withdrawn) states the standard:
"A non-performing asset (NPA) is a loan or an advance where interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan."
The rule sounds mechanical. A payment is either 90 days late or it is not. But the simplicity of the standard disguised the complexity of its application. This is why the real story of NPA recognition in India is not about the rule itself — it is about the ecosystem of exceptions, workarounds, and definitional ambiguities that Indian banking created to allow trillions of rupees in stressed loans to avoid the NPA label.
The 90-day norm was not India's original standard. Before the Narasimham Committee recommendations of 1991, commercial banks used 180 days. Co-operative banks used 180 days until far more recently. Agricultural loans were assessed by crop season rather than calendar days. Infrastructure projects received extended timelines because their cash flows were lumpy. Each exception had a reasonable-sounding justification, and each created an opportunity to delay recognition of loans that were never going to be repaid.
Why did the Narasimham Committee recommend uniform NPA norms?
The Committee on the Financial System, chaired by M. Narasimham, reported in 1991 against the backdrop of India's balance of payments crisis. The banking system was in worse shape than anyone publicly acknowledged. Banks were carrying loans to state-owned enterprises and politically connected borrowers that had not been serviced in years but were still classified as standard assets. The 180-day recognition window meant that a borrower could miss two quarterly payments before anyone was required to notice.
Narasimham recommended the 90-day norm to align India with international practice and to force earlier recognition of stress. The logic was preventive: the sooner a bank acknowledges a problem loan, the sooner it begins provisioning, and the less likely the problem grows to a scale that threatens the institution. The recommendation was adopted for commercial banks in stages through the 1990s, reaching full implementation by 2004. But the recommendation alone was not enough because the rule only works if banks cannot game the classification system. For the next two decades, they did.
How did banks avoid the 90-day clock?
The most common technique was evergreening — renewing a loan just before it hit 90 days overdue, resetting the clock without requiring actual repayment. A borrower who owed Rs 100 crore would receive a fresh Rs 100 crore facility, use it to repay the old loan, and the bank's books would show no default. The original debt was never retired; it was simply rolled into a new instrument. The borrower never repaid. The bank never provisioned. And the bank's reported profit included interest income that existed only because the renewal had generated a fresh receivable.
The August 2020 circular on ad-hoc credit facilities RBI/2020-21/27 attacked this 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
Why did it take two decades after the 90-day norm was adopted for this circular to appear? Because the evergreening problem was systemic. It was not a few rogue banks exploiting a loophole. It was standard practice across the industry, tolerated because acknowledging the true scale of NPAs would have required capital that many banks did not have. The NPA recovery timeline traces how each generation of restructuring mechanism — CDR, SDR, S4A, JLF — created new avenues for banks to extend credit to failing borrowers under the guise of resolution.
Why did the June 2019 Prudential Framework replace everything that came before?
Between 2001 and 2018, the RBI created multiple resolution mechanisms for stressed assets. Corporate Debt Restructuring was introduced for consortium loans. The Strategic Debt Restructuring scheme allowed banks to convert debt to equity and take management control. The Scheme for Sustainable Structuring of Stressed Assets offered long-tenor restructuring. The Joint Lenders' Forum required banks with common exposures to agree on a resolution plan. Each mechanism was designed to fix the failures of its predecessor. Each was gamed by the industry.
The Prudential Framework for Resolution of Stressed Assets RBI/2018-19/203 (since withdrawn), issued June 7, 2019, replaced every previous mechanism with a single time-bound process. The framework introduced three innovations that the earlier mechanisms lacked.
First, a mandatory 30-day review period from the date of first default. Banks could no longer wait for the 90-day NPA classification before acting. The moment a borrower defaulted on any obligation, the clock started. Second, a 180-day deadline for completing resolution, with escalating provisioning penalties — 20% additional provisioning if breached, rising to 35% at 365 days. Third, an Inter-Creditor Agreement requiring 75% of lenders by value to agree on a resolution plan, preventing individual lenders from holding out.
"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." Prudential Framework for Resolution of Stressed Assets (since withdrawn)
That warning was directed at an entire industry that had spent two decades treating NPA recognition as optional. Why did the 2019 Framework succeed where every predecessor failed? Because it removed discretion. Previous mechanisms had given banks choices: which restructuring scheme to use, how to define viability, when to start the clock. The 2019 Framework made every step mandatory and every timeline non-negotiable. The wilful defaulter framework addresses deliberate non-repayment; the Prudential Framework addresses the banks that helped borrowers avoid recognition.
How does the SMA system work as an early warning?
The Special Mention Account classification system creates tripwires before the 90-day NPA threshold. The Prudential Framework RBI/2018-19/203 (since withdrawn) defines three categories: SMA-0 covers accounts where principal or interest is overdue for 1 to 30 days. SMA-1 covers 31 to 60 days. SMA-2 covers 61 to 90 days. The moment an account enters SMA-0, the lender is required to begin a review. By SMA-2, the account is one missed payment away from NPA classification, and the bank should already be developing a resolution strategy.
The SMA system exists because the old approach — waiting until a loan was formally classified as non-performing before acting — guaranteed that by the time resolution began, the borrower's financial position had deteriorated beyond rescue. Preventive intervention at the SMA stage is cheaper, faster, and more likely to preserve value than resolution after NPA classification. The September 2009 circular on NPA computation RBI/2009-10/168 (since withdrawn) had revealed the underlying 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." Prudential Norms on Income Recognition, Asset Classification... (since withdrawn)
SMA reporting feeds into the Central Repository of Information on Large Credits (CRILC), which means the RBI can see stress building across the system before individual banks acknowledge it. The reporting chain — borrower defaults, bank classifies SMA, CRILC aggregates across lenders, RBI identifies systemic patterns — was the missing piece in every earlier framework. It created a single view of borrower exposure across lenders that made it impossible to hide stress by splitting exposures across banks that did not talk to each other.
Why did the RBI mandate system-based NPA classification?
The PMC Bank failure demonstrated the most dangerous failure of manual NPA classification. PMC Bank management used manual overrides in the core banking system to hide Rs 6,500 crore in loans to a single real estate group — HDIL. The loans were non-performing by any standard, but manual intervention in the NPA classification process ensured they never appeared in regulatory reports. Inspectors checking the bank's systems saw what management wanted them to see.
The Commercial Banks Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti), part of the November 2025 consolidation, embeds automated NPA classification as a non-negotiable requirement. Banks must implement system-driven identification of NPAs based on the record of days past due in the core banking system. No manual override is permitted for NPA classification or de-classification. The system tags the account; the bank reports it. Human judgment is removed from the recognition step because human judgment had been corrupted.
The Provisioning Coverage Ratio RBI/2010-11/485 (since withdrawn) had tried to build a buffer against under-recognition:
"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 (since withdrawn)
But a provisioning ratio is only as good as the NPA number it is applied to. If the NPA number itself is manipulated through manual overrides or evergreening, the buffer is insufficient. System-based classification and the Credit Information Reporting Directions (Reserve Bank of India (Commercial Banks – Credit I) close the loop: automated recognition ensures the NPA number is accurate, and mandatory CRILC reporting ensures the RBI sees it in real time.
What does the post-2025 NPA framework look like?
The November 2025 consolidation replaced the accumulated layer of NPA circulars with entity-specific IRAC (Income Recognition, Asset Classification) Directions. The Commercial Banks Resolution Direction (Reserve Bank of India (Commercial Banks – Resoluti) covers scheduled commercial banks. The UCB IRAC Direction (Reserve Bank of India (Urban Co-operative Banks –) covers urban co-operative banks. The Rural Co-operative Banks IRAC Amendment Direction RBI/2025-26/208, issued February 2026, brought rural co-operatives under updated norms. Each entity type now has a self-contained document governing how its loans are recognised, classified, and provisioned.
The historical chain — Narasimham Committee to 180-day norm to 90-day norm to CDR to SDR to S4A to JLF to the February 2018 circular to the Supreme Court striking it down to the June 2019 Prudential Framework to the November 2025 consolidation — represents two decades of the RBI learning that rules without enforcement are suggestions, and that the banking industry will exploit every gap between the two. The 90-day rule is now enforced not because banks voluntarily comply, but because the classification system is automated, the reporting system is centralised, and the consequences of concealment are severe enough to matter. The complete enforcement chain details what happens to banks that still try.
The penalty imposed on Shree Mahayogi Lakshmamma Co-operative Bank (Reserve Bank of India imposes monetary penalty on) — one of hundreds in the enforcement record — demonstrates the current regime: an ISE inspection identified NPA misclassification, a show-cause notice was issued, and monetary penalties followed. The resolution framework for what happens after a loan goes bad picks up where the 90-day recognition leaves off.
The rule itself never changed. Ninety days is ninety days. That is why the real lesson of India's NPA crisis is not about the definition of a bad loan — it is about the institutional architecture around it — automated systems that count the days without human intervention, centralised repositories that aggregate the counts across lenders, and enforcement consequences that make manipulation costlier than recognition. It took twenty years to build that architecture. The banking system's NPA ratio has fallen from 11.5% in 2018 to under 3% in 2025. The rule did not get stricter. The system finally got serious about applying it.
Last updated: April 2026