Non-Banking Financial Companies (NBFCs) play a critical role in India’s financial ecosystem by extending credit to sectors and borrowers often underserved by traditional banks. However, the sustainability of NBFCs is closely linked to their ability to manage Non-Performing Assets (NPAs) effectively. Rising NPAs not only weaken profitability but also invite regulatory scrutiny and erode stakeholder confidence.
Recognising this, the Reserve Bank of India (RBI) has laid down a robust framework under the RBI (Non-Banking Financial Companies – Income Recognition, Asset Classification and Provisioning) Directions, 2025, read with the Scale Based Regulation (SBR) framework, to ensure timely recognition, classification, and provisioning of stressed assets. This article provides a holistic overview of NPA management in NBFCs, covering asset classification, provisioning norms, layer-wise differences, income recognition, and governance requirements.
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1.1 Meaning of Non-Performing Asset (NPA)
An asset becomes a Non-Performing Asset when it ceases to generate income for the NBFC. In simple terms, if the borrower fails to pay interest or principal for a specified period, the loan is treated as an NPA.
An amount is considered “overdue” if it is not paid on the due date fixed by the NBFC at the time of sanction.
1.2 When Does an Asset Become an NPA?
For most NBFCs, an asset is classified as an NPA if:
As per RBI Directions, every NBFC must classify its assets based on credit risk and recovery prospects. Asset classification is borrower-wise and not facility-wise. If one credit facility of a borrower becomes NPA, all facilities granted to that borrower must be treated as NPA.
These are assets where no default in repayment of principal or interest is perceived. They do not disclose any problem and do not carry more than normal business risk.
An asset is classified as sub-standard if it has been an NPA for a period not exceeding 12 months.
An asset is considered doubtful if it has remained in the sub-standard category for a period exceeding 12 months. These are further sub-categorized based on the duration for which they have remained doubtful.
A loss asset is one where a loss has been identified by the NBFC, its auditors, or the RBI, but the amount has not been written off. These assets are considered uncollectible and of such little value that their continuance as bankable assets is not warranted,
RBI’s Scale Based Regulation divides NBFCs into Base Layer (BL), Middle Layer (ML), and Upper Layer (UL), with different prudential norms.
ASSET CATEGORY | NBFC-BL | NBFC-ML & NBFC-UL |
Standard | Overdue < 180 days | Overdue < 90 days |
Sub-Standard | NPA for ≤ 18 months | NPA for ≤ 12 months |
Doubtful | Sub-Standard for > 18 months | Sub-Standard for > 12 months |
Loss | Identified loss, not written off | Identified loss, not written off |
3.1 NPA Recognition Norms
Glide Path for NBFC-BL:
Overdue Period | Timeline |
> 150 days | By 31 March 2024 |
> 120 days | By 31 March 2025 |
> 90 days | By 31 March 2026 |
Provisioning is a critical risk-mitigation tool ensuring that potential losses are adequately covered.
4.1 Provisioning for Standard Assets
NBFC-BL | 0.25% |
NBFC-ML | 0.40% |
NBFC-UL | 0.25% – 1.00% (sector-specific) |
4.2 Provisioning for NPAs (All NBFCs)
Sub-Standard Assets: 10% of total outstanding
Doubtful Assets
Period as Doubtful | Secured Portion | Unsecured Portion |
Up to 1 year | 20 – 25% | 100% |
1-3 years | 30 – 40% | 100% |
More than 3 years | 50% | 100% |
Loss Assets: 100% provision or complete write-off
Income recognition is a crucial pillar of NPA management, as it ensures that NBFCs do not overstate their profitability by recognising unrealised income. As per RBI directions, once an asset is classified as an NPA, the NBFC is prohibited from recognising income on an accrual basis.
Interest income on NPAs can be booked only when it is actually realised in cash. Any interest that was previously recognised but remains unrealised must either be reversed or fully provided for. This prevents artificial inflation of income and ensures a realistic assessment of the NBFC’s financial position.
In the absence of a specific contractual agreement, any recovery made from an NPA account must be appropriated in the following order:
This disciplined approach strengthens transparency and aligns income recognition with actual cash flows.
Upgradation of an NPA account to a standard asset is permitted only under strict conditions laid down by the RBI. An asset cannot be upgraded merely on the basis of partial payments or temporary regularisation.
For an NPA to be upgraded:
In the case of restructured or resolved accounts, upgradation is governed by the RBI’s framework on resolution of stressed assets. This ensures that asset upgradation reflects genuine financial improvement rather than cosmetic compliance.
NBFCs following Ind-AS are required to adopt the Expected Credit Loss (ECL) model for impairment recognition. Unlike traditional provisioning methods, ECL allows NBFCs to recognise credit losses even before a default occurs, based on forward-looking information.
Under the ECL framework:
To operationalise this, NBFCs must maintain a Board-approved impairment policy, outlining assumptions, risk parameters, and staging criteria. The ECL approach enhances early identification of stress and plays a significant role in strengthening overall NPA management.
Certain situations require heightened prudence in NPA recognition and provisioning.
In the case of fraud accounts, the RBI mandates immediate classification and 100% provisioning, irrespective of the availability or value of security. Such accounts cannot benefit from delayed recognition or gradual provisioning, reflecting the seriousness of governance and integrity failures.
Similarly, where a borrower has multiple credit facilities, deterioration in one facility indicates broader credit weakness. Accordingly, if one facility becomes non-performing, all facilities extended to the borrower must be classified as NPAs. This borrower-wise approach ensures realistic risk assessment and avoids selective asset classification.
Strong governance mechanisms form the backbone of effective NPA management in NBFCs. Every NBFC is required to adopt a Board-approved policy covering asset classification, income recognition, provisioning norms, and recovery strategies.
From a disclosure perspective, NBFCs must provide transparent information in their financial statements, including:
These disclosures enhance accountability, enable informed decision-making by stakeholders, and facilitate effective regulatory supervision.
NPA levels play a decisive role in NBFC takeovers and change-in-control transactions. During due diligence, asset quality and provisioning adequacy are closely examined to assess the true financial health of the target NBFC.
High NPAs often result in:
Conversely, a well-managed NPA framework signals sound risk governance and strengthens the credibility of the NBFC in takeover and restructuring scenarios.
Effective NPA management is the cornerstone of a resilient NBFC. The RBI’s harmonised 90-day NPA norm, combined with layer-specific provisioning and strict income recognition rules, reflects a shift towards early stress detection and financial discipline. While regulatory compliance is mandatory, proactive credit monitoring, realistic provisioning, and robust recovery mechanisms ultimately determine the long-term viability of NBFCs.
By adopting a structured and transparent approach to NPA management, NBFCs can safeguard asset quality, maintain regulatory confidence, and continue playing their vital role in India’s credit ecosystem.
An NPA is a loan where the borrower has stopped paying money back for a long time, so the loan is no longer earning income for the NBFC.
Usually, if a borrower does not pay the loan instalment for more than 3 months (90 days), the loan is treated as an NPA.
Loans are grouped into four types:
If you stop paying one loan, the NBFC may treat all your loans as problem loans, because it shows overall difficulty in repayment.
Most NBFCs follow the 90-day rule. Smaller NBFCs are being given extra time to slowly move to this rule, as allowed by the RBI.
The NBFC keeps aside some money as a safety cushion (called provision) in case the loan is not recovered.
No. Once a loan becomes an NPA, the NBFC can count interest as income only if the borrower actually pays it.
Yes, but only if the borrower pays all pending instalments and interest. Partial payment is not enough.
If fraud is found, the NBFC must immediately treat the loan as a complete loss and keep aside the full amount as provision.
Good NPA management keeps the NBFC financially healthy, protects customers’ money, follows RBI rules, and helps the company grow safely.
