Asset Quality and Non-Performing Assets
When a loan turns bad, how NPAs are classified as sub-standard, doubtful or loss, the SMA early-warning buckets, and the gross NPA, net NPA and provision coverage ratios — with a worked calculation and the life-cycle of a bad loan from slippage to resolution.
What you will be able to do
- State the 90-day rule and how the NPA trigger differs across loan types.
- Classify an NPA as sub-standard, doubtful or loss and order the SMA buckets.
- Compute the gross NPA ratio, net NPA ratio and provision coverage ratio from a balance-sheet extract.
- Explain slippage, upgradation, write-off versus waiver, restructuring and the IBC resolution route.
What is inside this lesson
- 1Why asset quality matters
- 2What makes an asset non-performing
- 3Four-way classification
- 4SMA early-warning buckets
- 5Gross NPA, net NPA and provision coverage
- 6Reading a bank's asset-quality numbers
- 7Life-cycle of a bad loan
- 8Common confusions
- 9Quick revision
- 10Practice
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Why asset quality matters
A loan is an asset on a bank's balance sheet: it is meant to earn interest and be repaid. When a borrower stops servicing a loan, that asset stops performing — it earns nothing and may not be recovered in full.
Asset quality is watched closely because bad loans hit a bank three ways: interest income stops being recognised, the bank must set aside provisions (a charge against profit) for the expected loss, and sustained losses erode capital, which limits how much the bank can lend. Supervisors therefore prescribe exactly when a loan turns bad and how much must be held against it.
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