NPA Classification & SARFAESI Act Explained for JAIIB — Complete Guide with Examples

NPA (Non-Performing Asset) classification and the SARFAESI Act together account for 8-12 questions across PPB and RBWM papers. This is one of the highest-yielding topics in JAIIB — master it and you are almost guaranteed 15+ marks across both papers.

What is a Non-Performing Asset (NPA)?

An asset (loan/advance) becomes non-performing when it ceases to generate income for the bank. Specifically, a loan account is classified as NPA when the interest or instalment of principal remains overdue for more than 90 days. For agricultural loans, the timeline is different — it is linked to crop seasons.

Key Point: "Overdue" means the amount is not paid on the due date fixed by the bank. If your EMI is due on the 5th of every month and you don't pay on the 5th, it becomes "overdue" from the 6th.

Pre-NPA Classification: Special Mention Accounts (SMA)

Before an account becomes NPA, RBI requires banks to classify it under the SMA (Special Mention Account) framework for early warning:

CRILC = Central Repository of Information on Large Credits. Banks must report weekly data for borrowers with aggregate exposure of ₹5 crore and above.

NPA Sub-Categories (Asset Classification)

Once classified as NPA, the account further deteriorates through these stages:

Special Case: Agricultural Loans

For short-duration crops (up to one crop season for short crops), the account is classified as NPA if the instalment of principal or interest remains overdue for 2 crop seasons. For long-duration crops, it is 1 crop season from the due date. This is different from the standard 90-day rule.

SARFAESI Act 2002 — The Bank's Recovery Weapon

SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) gives banks the power to recover NPAs without going to court. It is the most powerful recovery tool available to secured creditors.

When Can SARFAESI Be Used?

• Loan amount must be above ₹1 lakh
• Account must be classified as NPA
• The bank must have a valid security interest (collateral)
• NOT applicable to: agricultural land, loans below ₹1 lakh, security interest in aircraft/ships/vessels, unpledged assets

SARFAESI Process (Step by Step)

1. Section 13(2) Notice: Bank serves a 60-day demand notice to the borrower to repay the outstanding amount
2. Borrower's Response: Borrower has 60 days to either pay or make representations to the bank
3. Section 13(4) Actions (if not paid): After 60 days, bank can:
   • Take possession of the secured asset
   • Sell/lease/assign the secured asset
   • Appoint a manager to manage the secured asset
   • Require any person who has acquired the secured asset to pay remaining debt to the bank
4. Borrower's Appeal: Borrower can file application to DRT under Section 17 within 45 days of the bank's action

Key SARFAESI Facts for Exam

• Multiple banks holding security in same asset: bank with 60%+ share can initiate SARFAESI
• Personal guarantee holders can also be proceeded against under SARFAESI
• The Authorized Officer (bank employee) must be of DGM rank or above for taking possession
• After possession, sale must be conducted within 30 days (extendable by 2 months)
• Reserve price must not be below 80% of market value (earlier was valuation by approved valuer)

DRT (Debts Recovery Tribunal)

For debts of ₹20 lakh and above, banks can approach the DRT. Key facts:

• Established under the Recovery of Debts and Bankruptcy Act (RDDBFI Act) 1993
• Presiding Officer is equivalent to a District Judge
• Must dispose of applications within 180 days from the date of receipt
• Appeal lies to DRAT (Debts Recovery Appellate Tribunal) within 45 days
• Borrower must deposit 50% of the debt before filing appeal to DRAT (this can be reduced to 25% by DRAT)

Lok Adalat for NPA Recovery

For NPAs up to ₹20 lakh, Lok Adalat is the preferred forum. Key facts:

• No court fees payable
• Decision is final and binding — no appeal possible (under Section 21 of Legal Services Authorities Act)
• Both parties must consent to Lok Adalat proceedings
• Decree of Lok Adalat is deemed a decree of civil court
• Suitable for compromise/settlement cases where both parties agree

Comparison Table: SARFAESI vs DRT vs Lok Adalat

Upgradation of NPA to Standard

An NPA can be upgraded back to "Standard" asset if:

• All arrears of interest and principal are paid by the borrower (not just current instalment)
• For restructured accounts: account performs satisfactorily for 1 year from the first payment due date after restructuring
• Upgradation is not permitted merely because the account has been rescheduled/renegotiated

FAQs

When does a loan account become an NPA under the 90 day norm?

A term loan turns into an NPA when interest or principal stays unpaid for more than 90 days past the due date. For other facilities like cash credit, the same overdue logic applies as per the prevailing regulatory guidelines.

What is the difference between substandard, doubtful, and loss assets?

Substandard refers to an NPA held for a relatively short period while doubtful refers to an NPA that has stayed in that state for a longer stretch. Loss denotes an asset where recovery looks extremely remote even though some value may still be on record.

What are the broad steps under Section 13 of the SARFAESI Act?

The process generally starts with a demand notice followed by possession action if dues remain unpaid within the stipulated period. It may then proceed to sale of the secured asset after due notices and valuation as per the prescribed procedure.

What are the basics of OTS that JAIIB aspirants should know?

OTS stands for one time settlement where a lender agrees to accept a negotiated amount to close a stressed account. Banks use board approved policies to assess eligibility, settlement amount, and payment timelines, so check the official framework for exact norms.