A loan that is not meeting its stated principal and interest repayments is called non-performing asset or NPA. Any commercial loans which are more than 90 days overdue are usually classified as nonperforming assets by banks.
Loans of this type are considered nonperforming because the bank is no longer receiving a return on the investment made since the borrower is no longer paying on the principle or the interest of the loan. The criterion used to determine if a loan is nonperforming varies slightly from lender to lender, but there are a few basic guidelines that are used by most types of lenders.
Once the defaulted loans (loans of any kind – home loan, mortgage loan, car loan etc.) are considered as NPA, any repayments to these loans will not be considered as income by the bank. Banks usually have a provision allotted in the balance sheet to handle NPA’s. The loan which has remained NPA for a period less than or equal to 12 month is called substandard Asset. An asset would be classified as doubtful if it remained in the sub-standard category for 12 months. A loss asset is one which considered noncollectable/irrecoverable and of very little value even if there may be some salvage or recovery value.