Written By: Nishant Parsad
Let’s start with a simple question:
Is your money safe in the bank?
Your instinct says yes, right? It’s the bank. The fortress of modern finance.
But what if I told you there’s a silent crisis buried deep inside our banking system, one that’s been quietly eating into your financial security?
It’s called an NPA — a Non-Performing Asset and it’s not just a banking problem.
It’s an everyone problem. Yours, mine, your startup friend’s, even the entire country’s.
And if you’re investing in bank stocks, mutual funds, or simply saving money for your future —
you need to understand how deadly this quiet little acronym can be.
Let’s Simplify This : What Is an NPA?
To understand NPAs, imagine this.
You lend your bike to a friend.
He promises to return it in a week.
A month passes. No bike. No calls. No response.
Now imagine this bike was worth ₹1 crore and you were expecting a monthly EMI in return.
That’s exactly what a bank feels when a borrower stops paying their dues for 90 days or more.
At that point, the loan officially becomes a Non-Performing Asset — a technical way of saying:
“This money may never come back.”
Banks deal with money like shops deal with products.
If the product doesn’t sell, it’s dead stock.
If a loan doesn’t pay — it’s a dead investment.
And unlike a product, loans don’t sit on shelves quietly.
They burn the bank from inside — interest stops coming in, recovery costs rise, reputation suffers, and eventually, your access to credit tightens.
But Wait… Can’t the Bank Just Recover the Loan?
Sounds logical, but real life isn’t as clean as a balance sheet.
Let’s say a bank lends ₹100 crore to a steel company.
The borrower defaults. The bank tries to sell the factory land and machinery.
But here’s the catch:
– The assets don’t fetch even 40% of their value in auctions
– Legal disputes delay recovery by years
– The borrower goes bankrupt or flees (remember Vijay Mallya?)
– By the time the court judgment comes, the market value is already gone
Recovering an NPA is like squeezing toothpaste back into the tube — possible in theory, messy in reality.
And the longer recovery takes, the more damage it does.
So, What’s the Damage?
Let’s not talk in percentages. Let’s talk in real money.
As per RBI data, India’s banking system was dealing with ₹5 lakh crore+ worth of NPAs in recent years.
To give you perspective, that’s more than India’s annual education budget.
And here’s the kicker — the biggest defaulters aren’t small borrowers or poor farmers.
They’re often corporates with flashy balance sheets and political connections.
Banks write off thousands of crores every year just to clean up books.
And when they write off a loan, they aren’t waving a magic wand.
They’re using your money, your deposits, your trust — to absorb the loss.
Why NPAs Matter for You (Even If You’re Not a Banker)
Still thinking — “Okay, but how does this affect me?”
Here’s how:
– Higher NPAs → Lower bank profits
→ Bank cuts lending, raises interest rates
→ Your home loan becomes expensive
– Higher NPAs → More provisioning required
→ Banks set aside money as a buffer
→ That money could’ve been used to fund startups or MSMEs
– Higher NPAs → Lower investor confidence
→ Banking stock prices fall
→ Your SIP in a banking-focused mutual fund underperforms
It’s not just a corporate issue.
NPAs impact your EMIs, your returns, and your access to finance.
Types of NPAs – Not All Are Equal
All NPAs are bad, but some are worse than others.
Here’s how banks classify them:
- Substandard Asset: Loan has been an NPA for less than 12 months
- Doubtful Asset: NPA for over 12 months — high risk of loss
- Loss Asset: The bank knows it’s a goner. They’ve accepted they’ll never recover this
Why does classification matter? Because it affects provisioning — how much buffer capital the bank must set aside.
More NPAs = More provisioning = Lower profits = Lower investor trust
As an analyst, if a bank’s provisioning spiked last quarter, you should be asking:
“Is the NPA iceberg getting bigger under the surface?”
What’s Being Done? The Fight Against NPAs
It’s not like regulators are sitting idle.
India brought in several reforms over the last decade:
– Insolvency & Bankruptcy Code (IBC): A legal framework to speed up recovery
– ARCs (Asset Reconstruction Companies): To buy and manage bad loans
– Basel Norms: Require banks to maintain healthy capital ratios
– Prompt Corrective Action (PCA): RBI’s watchlist for mismanaged banks
– Bad Bank (NARCL): A special vehicle to transfer and resolve NPAs
But even with these tools, the pace of resolution remains slow.
Why? Because legal delays, weak enforcement, and political pressure still haunt the process.
NPAs in India behave like villains in South Indian movies — no matter how many times you kill them, they come back stronger.
Why It’s Still a Ticking Time Bomb
Let’s connect the dots now.
When NPAs rise beyond control:
– Banks tighten lending
– Credit availability shrinks
– Businesses can’t expand
– GDP growth slows
– Investor sentiment falls
– And eventually, we flirt with a 2008-style banking crisis
In fact, many experts argue that India’s own banking crisis of 2016–2018 (led by PSU banks) was masked only due to RBI recapitalization and LIC bailouts.
We didn’t fix the wound, we bandaged it.
Final Thoughts: What Can You ( a Retail Investor) Do?
You may not be a banker or a policymaker. But here’s what you can — and must — do:
– Track NPA ratios when investing in bank stocks
– Look beyond net profit — check provisioning and write-offs
– Ask AMCs how they monitor credit quality in their debt/banking funds
– Demand transparency from listed companies on related party loans
– Read footnotes — because NPAs often hide there
Because the truth is — NPAs are not just a risk to banks.
They are a risk to your wealth, your trust, and your economic future.
So next time you walk into a shiny bank branch or check your balance online, remember:
A large part of India’s banking system is quietly cleaning up bombs.
And you better know how many are left to defuse — before one goes off.