Non-performing Assets in Banks: the 90 Day Rule and Provisioning

A loan that is not being repaid is still an asset on the bank's books until the bank says otherwise. Left to itself, a bank has every incentive to say nothing, because recognising the loss costs capital and profit. The prudential norms on income recognition, asset classification and provisioning take that judgment away. They fix an objective moment at which an account becomes non-performing, prescribe what must be set aside against it, and forbid the bank to count interest it has not received.

1. Why the Norms Exist

• The temptation: an unrecognised bad loan keeps appearing as a performing asset, accrued interest keeps appearing as income, and the bank keeps appearing profitable. The practice of lending afresh to service an existing loan, called evergreening, conceals the position still further.
• The answer: an objective test based on the number of days overdue, not on the bank's assessment of the borrower's prospects.
• The source: for many years the Reserve Bank's Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, issued under Section 35A of the Banking Regulation Act, 1949 and binding on every bank. In the Reserve Bank's consolidation of its instructions on 28 November 2025, the norms for commercial banks were carried into the Reserve Bank of India (Commercial Banks: Income Recognition, Asset Classification and Provisioning) Directions, 2025.
• Expected credit loss: final directions issued on 27 April 2026 move commercial banks, other than small finance, payments and local area banks, to an expected credit loss model from 1 April 2027, under which provisions are staged by the increase in credit risk since a loan was made. Non-performing status remains one of the events marking an asset as credit impaired.
• The origin: the Narasimham Committee of 1991 recommended the adoption of international norms, and India moved to a ninety day test from 31 March 2004, having used a longer period before that.

2. When an Asset Becomes Non-performing

• The definition: an asset is non-performing when it ceases to generate income for the bank.
• Term loan: interest or an instalment of principal remains overdue for a period of more than ninety days.
• Cash credit or overdraft: the account remains out of order for ninety days.
• Out of order: the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for ninety days; or, where the balance is within the limit, there are no credits continuously for ninety days, or the credits are not enough to cover the interest debited during the same period.
• Bills purchased and discounted: the bill remains overdue for more than ninety days.
• Agricultural advances: for a short duration crop, the instalment or interest remains overdue for two crop seasons; for a long duration crop, for one crop season. A long duration crop is one of more than one year's duration.
• Overdue means: any amount not paid on the due date fixed by the bank. The day after the due date is the first day of default.
• A day end process: classification as a special mention account or as a non-performing asset is done as part of the day end process for the relevant date, which removes the earlier practice of classifying only at month end or quarter end.
• Borrower-wise, not facility-wise: if one facility of a borrower becomes non-performing, all facilities of that borrower are classified as non-performing, with limited exceptions.

Figure 1: The test for the two principal kinds of facility

3. Special Mention Accounts

Figure 2: The journey from the first missed payment

• The purpose: to identify stress before an account becomes non-performing, so that the lender and the system can act while something can still be done.
• For term loans: SMA-0 where principal or interest is overdue between one and thirty days; SMA-1 between thirty one and sixty days; SMA-2 between sixty one and ninety days.
• For cash credit and overdraft: SMA-1 where the account is out of order for thirty one to sixty days, and SMA-2 for sixty one to ninety days.
• Reporting: lenders report credit information, including classification as a special mention account, to the Central Repository of Information on Large Credits for borrowers with an aggregate exposure above the prescribed threshold, so that every lender to that borrower sees the stress at once.
• Significance: under the framework for the resolution of stressed assets, a default with any lender, that is the first day an account becomes overdue, starts the thirty day review period. The special mention classes therefore track an account whose resolution clock is already running.

4. The Four Classes of Asset

• Standard asset: one which does not disclose any problem and does not carry more than normal risk attached to the business. It is not a non-performing asset.
• Sub-standard asset: one which has remained non-performing for a period less than or equal to twelve months. The current net worth of the borrower, or the current market value of the security, is not enough to ensure recovery in full.
• Doubtful asset: one which has remained in the sub-standard category for twelve months. Collection in full is, on the facts known, highly questionable and improbable. It is further divided by how long it has been doubtful: up to one year, one to three years, and more than three years.
• Loss asset: one where loss has been identified by the bank, its internal or external auditors, or the Reserve Bank's inspection, but the amount has not been wholly written off. It may still have some salvage value, but is not considered bankable.
• Movement is one way unless arrears are cleared: an account deteriorates by the passage of time alone, and can improve only by payment.

5. Provisioning

• What a provision is: an amount charged to the profit and loss account and held against expected loss. It reduces reported profit and, through that, the capital available for distribution.
• Standard assets: a general provision on the outstanding, at a rate that varies by sector. It is lower for direct advances to agriculture and to micro and small enterprises, and higher for commercial real estate, which the Reserve Bank treats as more cyclical.
• Sub-standard assets: fifteen per cent of the total outstanding, and twenty five per cent where the exposure is unsecured ab initio, that is where the realisable value of the security was never more than ten per cent of the outstanding.
• Doubtful assets: the unsecured portion attracts one hundred per cent. The secured portion attracts twenty five per cent where the asset has been doubtful up to one year, forty per cent where it has been doubtful for one to three years, and one hundred per cent where it has been doubtful for more than three years.
• Loss assets: one hundred per cent of the outstanding, where the asset has not been written off.
• Provision coverage ratio: the ratio of provisions held to gross non-performing assets, which the Reserve Bank has at times required to be maintained at a floor, so that the provisions reflect the actual quality of the book rather than only the minimum scale.
• Countercyclical buffer: provisions made in good years over and above the requirement may be held in a counter-cyclical provisioning buffer and drawn down, with the Reserve Bank's permission, in a downturn.
• Floating provisions: general provisions not made against any identified asset. They may be used only for contingencies under extraordinary circumstances with the Reserve Bank's prior permission, and may otherwise be netted from gross non-performing assets or treated as part of tier 2 capital within limits.

6. Income Recognition and Upgradation

• The rule: income from a non-performing asset may not be recognised on an accrual basis. It may be recognised only when it is actually received.
• Reversal: where an account becomes non-performing, any interest already credited to income and not realised must be reversed or provided for, which is why classification has an immediate effect on reported profit.
• Appropriation of recoveries: in the absence of a clear agreement, a bank may adopt an accounting principle for appropriating recoveries between principal and interest, applied consistently.
• Upgradation: an account classified as non-performing may be upgraded to standard only when the entire arrears of interest and principal are paid by the borrower. Partial payment that merely brings the account within ninety days of overdue is not sufficient, a position the Reserve Bank clarified expressly in November 2021.
• Restructured accounts: restructuring does not by itself upgrade an account. A restructured standard account is ordinarily downgraded, and an upgrade follows only after a specified period of satisfactory performance.
• Write off: a bank may write off an asset in its books while continuing to pursue recovery. A technical or prudential write off removes the asset from the balance sheet but does not extinguish the borrower's liability or the bank's right to recover.

7. Questions Arising

Why is the test the number of days rather than the borrower's prospects?

Because the borrower's prospects are exactly what the lender is tempted to be optimistic about. A rule turning on judgment would permit two banks lending to the same borrower to report different positions, and would allow a bank under pressure to postpone recognition indefinitely. A mechanical test produces comparable figures across the system and is capable of verification by a supervisor, which is why the Reserve Bank's asset quality review of 2015 and 2016 was able to establish that reported non-performing assets had been substantially understated.

Does a technical write off mean the money is gone?

No. A technical or prudential write off removes a fully provided asset from the balance sheet for accounting purposes while the bank continues to pursue recovery through the recovery tribunals, the SARFAESI Act or insolvency proceedings. The borrower's liability is unaffected, no release is given, and recoveries after write off are credited to the profit and loss account. The practice is often reported as though the debt had been forgiven, which it has not.

8. Quick Revision

9. Frequently Asked Questions

When does a loan become a non-performing asset?

For a term loan, when interest or an instalment of principal remains overdue for more than ninety days. For a cash credit or overdraft, when the account remains out of order for ninety days. For a bill, when it remains overdue for more than ninety days. For agricultural advances, after two crop seasons for a short duration crop and one crop season for a long duration crop.

What does out of order mean?

That the outstanding balance remains continuously in excess of the sanctioned limit or drawing power for ninety days; or that, although the balance is within the limit, there have been no credits continuously for ninety days, or the credits during that period were not enough to cover the interest debited.

What are the categories of non-performing assets?

Sub-standard, where the asset has been non-performing for twelve months or less; doubtful, where it has remained sub-standard for twelve months, with sub-classes of up to one year, one to three years and more than three years; and loss, where loss has been identified by the bank, its auditors or the Reserve Bank but the amount has not been wholly written off.

What provision must a bank make against a doubtful asset?

One hundred per cent of the unsecured portion, together with a provision on the secured portion of twenty five per cent where the asset has been doubtful up to one year, forty per cent for one to three years, and one hundred per cent where it has been doubtful for more than three years.

When can a non-performing account be upgraded to standard?

Only when the entire arrears of interest and principal are paid. Partial payment that merely brings the overdue amount within ninety days is not sufficient, as the Reserve Bank clarified in November 2021. A restructured account is upgraded only after a specified period of satisfactory performance.

10. Related Topics and Provisions

• Resolution of stressed assets and wilful defaulters
• Recovery of Debts and Bankruptcy Act, 1993
• The SARFAESI Act and enforcement of security interest
• The Insolvency and Bankruptcy Code, 2016 and banks
• Accounts, audit, returns and disclosure
• Inspection, directions and penalties