Banking Notes / Banking Awareness / Chapter 10
Chapter 10 of 17

Non-Performing Assets (NPA), Basel Norms & Risk Management

How a loan becomes an NPA, the capital adequacy framework under Basel III, and the core risk categories banks manage.

📖 ~10 min read 🏛️ Banking Awareness

Introduction

A Non-Performing Asset (NPA) is a loan or advance where the borrower has stopped making interest or principal payments. Basel Norms are international banking regulations that set minimum capital requirements to keep banks solvent during periods of stress.

NPA Classification

CategoryDefinition
Standard AssetLoan with no default, or default up to 90 days
Sub-Standard AssetNPA for a period of 12 months or less
Doubtful AssetRemained in sub-standard category for 12 months
Loss AssetLoss identified but not yet fully written off; considered uncollectible
📌 Core Rule: An asset becomes an NPA when interest or principal instalment remains overdue for more than 90 days — this single figure underlies the entire classification system above.

Basel Norms

Basel AccordKey Focus
Basel I (1988)Introduced minimum capital adequacy ratio linked to credit risk
Basel II (2004)Added market risk and operational risk to capital requirements; introduced 3 pillars (capital adequacy, supervisory review, market discipline)
Basel III (post-2008 crisis)Strengthened capital quality, introduced Capital Conservation Buffer and Liquidity Coverage Ratio
Under Basel III, banks must maintain a minimum Capital Adequacy Ratio (CAR) — as implemented by RBI for Indian banks, this is generally set at 11.5% (9% minimum CRAR plus a 2.5% Capital Conservation Buffer), higher than the global Basel III minimum of 8%.

Core Risk Types in Banking

  • Credit Risk: Risk of borrower default on a loan.
  • Market Risk: Risk from adverse movement in interest rates, forex rates, or asset prices.
  • Operational Risk: Risk from internal process failures, fraud, or system breakdowns.
  • Liquidity Risk: Risk of not being able to meet short-term obligations.
Q. After how many days of continuous default does a loan account get classified as an NPA?
A loan is classified as an NPA when interest or principal remains overdue for more than 90 days.
⚠️ Key Insight: Basel norms set a global minimum standard, but individual country regulators (like the RBI) can — and often do — mandate a higher capital requirement than the Basel minimum; India's effective CAR requirement is higher than Basel III's baseline 8%.
✅ Practice Focus: The 90-day NPA threshold and sub-classification timelines · Basel I/II/III key distinguishing features · India's specific CAR requirement vs the global Basel minimum.

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