The term Non-Performing Asset (NPA) is the foundation on which recovery proceedings under the SARFAESI Act, 2002 are built. Many borrowers receive SARFAESI notices without clearly understanding why their loan account was classified as an NPA and what the legal consequences are.
This article explains the concept of NPA in simple terms, its legal meaning, and its importance under the SARFAESI framework.
What Is a Non-Performing Asset (NPA)?
In simple language, a loan becomes a Non-Performing Asset when the borrower fails to repay instalments or interest for a specified continuous period, resulting in loss of income to the lender.
Legally speaking, an NPA is a loan account where the bank no longer earns interest or principal repayment as per the agreed repayment schedule.
Statutory Basis of NPA Classification
Under banking regulations and the SARFAESI Act:
A loan account must first be classified as an NPA
Only after such classification can SARFAESI proceedings be initiated
👉 NPA classification is therefore a condition precedent for invoking SARFAESI powers.
When Does a Loan Become an NPA?
A loan account is generally treated as an NPA when:
Interest or instalments remain overdue for more than 90 days in respect of term loans
Outstandings remain overdue for more than 90 days in cash credit or overdraft accounts
Bills purchased or discounted remain overdue for more than 90 days
⚠️ Classification must be continuous, not based on occasional or technical defaults.
Types of NPAs (Brief Overview)
Sub-Standard Asset
Asset classified as NPA for a period up to 12 months.Doubtful Asset
Asset remaining sub-standard for more than 12 months.Loss Asset
Asset where loss has been identified but not fully written off.
👉 For SARFAESI purposes, the key requirement is NPA status, not the category.
Why Is NPA Classification Important Under SARFAESI?
The SARFAESI Act empowers banks to:
Issue demand notices
Take possession of secured assets
Conduct property auctions
However, none of these powers can be exercised unless the account is first declared an NPA.
If NPA classification itself is illegal or premature, entire SARFAESI proceedings can be challenged.
Can a Borrower Challenge NPA Classification?
Yes. Borrowers can legally challenge NPA classification on grounds such as:
Incorrect calculation of overdue amounts
Failure to consider payments already made
Account irregularity wrongly treated as default
Violation of RBI prudential norms
Mechanical or automated classification without application of mind
Courts and tribunals have repeatedly held that NPA declaration is not a mere formality.
NPA and SARFAESI Demand Notice (Section 13(2))
Once an account becomes NPA:
The bank may issue a 60-day demand notice
The notice must specify:
Amount due
Details of secured asset
Basis of default
The borrower has a statutory right to:
Make objections and representations
Seek correction of errors
Demand justification for NPA classification
Common Misunderstandings About NPA
❌ One missed EMI automatically makes the account NPA
❌ Bank can declare NPA at its discretion
❌ NPA cannot be questioned by borrower
✔ In reality, strict regulatory norms apply, and borrowers have legal remedies.
Consequences of an Account Becoming NPA
Once an account is classified as NPA:
SARFAESI proceedings may begin
Credit rating of borrower is affected
Secured assets become vulnerable to enforcement
Parallel proceedings (DRT, IBC, recovery suits) may follow
Timely action at the NPA stage itself can prevent severe consequences.
Practical Advice for Borrowers
Do not ignore early warning signs from banks
Seek clarification on overdue calculations
Respond promptly to SARFAESI notices
Challenge illegal NPA classification without delay
Obtain professional legal advice at the earliest stage
Role of an Advocate in NPA & SARFAESI Matters
An experienced advocate can:
Examine legality of NPA classification
Identify procedural violations
Draft effective objections
Challenge illegal SARFAESI action before DRT
Secure interim protection against possession or auction
Conclusion
A Non-Performing Asset is not merely a banking label—it is a legal trigger that activates the powerful machinery of the SARFAESI Act. Borrowers must understand that improper or premature NPA classification can be legally challenged. Early intervention often makes the difference between resolution and irreversible enforcement.
FAQs
Q. Can SARFAESI be initiated without declaring the account NPA?
No. NPA classification is mandatory.
Q. Can a bank backdate NPA classification?
No. Artificial or retrospective classification is illegal.
Q. Is NPA classification final and unquestionable?
No. Borrowers can challenge it before appropriate forums.