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What is a Non-Performing Asset (NPA)?

Key Takeaways

  • A Non-Performing Asset (NPA) is a loan which is unpaid for over 90 days.
  • NPAs are categorised as substandard, doubtful, and loss assets depending on the loan default period
  • Financial instability, high-interest burdens, poor credit management, and economic downturns are the major causes of NPAs.
  • An increase in NPAs results in higher interest rates, limited credit supply, and a downturn in the economy.
21 May 2025 by Team FinFIRST
NPA in Banks
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Financial institutions lend money to borrowers expecting timely repayments. But, if a borrower does not make payments for a period of 90 days, the specific loan becomes a Non-Performing Asset (NPA). NPAs affect the borrower, lender, as well as the entire financial system. Thus, it is crucial for borrowers to understand the importance of timely repayments and avoid any chances of NPAs.

What is a Non-Performing Asset (NPA)
 

A Non-Performing Asset (NPA) refers to a loan in which the borrower has not paid either principal amount or interest for over 90 days.

Banks divide NPAs into three groups depending on the period of non-repayment.

  • A substandard asset is a loan that has been unpaid for a maximum of 12 months. The borrower still has an opportunity to recover from their defaulter status and repay the loan.
  • A doubtful asset is a loan which has not been repaid for over 12 months. Here, banks begin to question the recovery of the full amount.
  • A loss asset is a loan that has been identified as irrecoverable, meaning the bank has little to no hope of recovering the amount.

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Common reasons for NPAs
 

Loan defaults can ultimately lead to NPAs. Some common reasons which result in NPAs are:

  • Financial instability can result in NPAs when borrowers lose their jobs, experience business losses, or sudden decreases in income.
  • High interest rates raise the burden of repayment, and borrowers find it harder to repay EMIs.
  • Excessive borrowing without careful planning often results in borrowers being unable to manage multiple loan repayments.
  • Market fluctuations impact businesses, leading to cash flow problems that affect loan repayments.
  • Unexpected events such as medical emergencies, accidents, or economic downturns can push borrowers into default.

How borrowers can avoid falling into NPA status
 

Borrowers must adopt the following tips to avoid adding their name in the loan defaulter’s list:

  • Take a loan that they can pay comfortably, making sure the EMI is not more than 30-40% of their monthly income.
  • Pay on time to maintain a healthy credit score, which will in turn enable them to obtain more loans in the future.
  • Choose flexible repayment options with the ability to change EMI amounts according to their affordability.
  • Create an emergency fund that can cover 3-6 months of expenses, keeping them financially secure in case of unforeseen circumstances.

The key to financial freedom is not just earning more but managing debt wisely.

Managing debt effectively with FIRSTmoney
 

If you are paying high EMIs or managing multiple loans, you can consolidate your loans with FIRSTmoney. With competitive interest rates of 10.99% p.a. and a minimum loan amount of ₹ 50,000 to a maximum loan amount of ₹ 10 lakhs, borrowers can consolidate their repayments. Moreover, FIRSTmoney has zero foreclosure fees, making it easier for borrowers to repay the entire loan at once. This smart personal loan has a 100% digital process, ensuring quick approvals, and making debt management stress-free.

Conclusion
 

Understanding NPAs is crucial for borrowers to maintain financial stability. While unforeseen circumstances may lead to defaults, proper loan management, strategic financial planning, and responsible borrowing can prevent loans from turning into NPAs. If you need any financial support, FIRSTmoney’s tailored personal loans offer flexibility and affordability, ensuring that borrowers meet their financial commitments with ease.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.

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