NPA Identification for Term Loans, CC and OD Accounts - Article

Introduction

NPA identification looks simple until a case contains different types of credit facilities.

For a term loan, the main question is whether principal or interest has remained overdue for the prescribed period.

For a Cash Credit (CC) or Overdraft (OD) account, simply checking whether the borrower has paid an instalment is not enough. The bank must examine whether the account is “out of order.”

This distinction is important for CAIIB BFM. The 2026 IIBF syllabus includes Asset Classification and Provisioning Norms under Module D, and IIBF also advises candidates to prepare for current developments in banking and finance.:chatgpt-content-reference{index="0"}

As of September 2026, the applicable RBI framework for commercial banks is the Reserve Bank of India (Commercial Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025, updated as on July 1, 2026.:chatgpt-content-reference{index="1"}

Learning Objectives

After studying this topic, you should be able to:

• identify when a term loan becomes NPA;

• apply the three “out of order” tests to CC and OD accounts;

• determine the correct NPA date using the day-end concept;

• distinguish temporary irregularity from regulatory NPA conditions;

• apply borrower-wise classification correctly; and

• identify when an NPA can be upgraded to standard.

Term Loan vs CC/OD: Core Difference

RBI requires a term loan to be classified as NPA when interest and/or an instalment of principal remains overdue for more than 90 days. A CC/OD account becomes NPA when it satisfies the regulatory definition of “out of order.”:chatgpt-content-reference{index="2"}

Meaning of “Overdue”

An amount becomes overdue if it is not paid on the due date fixed by the bank.

Banks must flag an account as overdue during the day-end process for that due date, irrespective of the actual time at which the day-end process is run.:chatgpt-content-reference{index="3"}

This means there is no automatic additional grace period before overdue ageing begins.

Case 1: Instalment Not Paid on Due Date

A term-loan instalment is due on March 31.

The borrower does not pay the full amount before the bank completes its March 31 day-end process.

The account becomes overdue from March 31 itself.

If the overdue continues without being fully cleared, its SMA and NPA ageing proceeds from that date.

RBI’s own illustration shows that where dues payable on March 31 remain continuously unpaid, the account becomes SMA-1 on April 30, SMA-2 on May 30 and NPA on June 29.:chatgpt-content-reference{index="4"}

Term Loan NPA Identification

For a normal term loan, apply this sequence:

Identify Due Date → Check Amount Payable → Check Actual Recovery → Count Continuous Overdue Period → Determine NPA Status

Case 2: Principal Paid but Interest Remains Overdue

Suppose the borrower pays the principal instalment but leaves the interest component unpaid.

The account cannot be treated as regular merely because principal has been received.

The RBI test applies where interest and/or principal remains overdue for more than 90 days.:chatgpt-content-reference{index="5"}

Therefore, unpaid interest alone can result in NPA classification.

Case 3: Partial Instalment Payment

Suppose ₹50,000 is contractually due, but the borrower pays only ₹30,000.

The remaining ₹20,000 continues to be overdue.

A partial payment does not automatically restart overdue ageing for the unpaid amount.

For case-study purposes, focus on whether the entire amount due has actually been cleared.

Moratorium Cases

A term loan may contain a valid moratorium on principal or interest.

In such cases, an amount cannot become overdue before it is contractually due.

For permitted loans with a moratorium on interest, RBI provides that interest becomes due only after the moratorium or gestation period ends. Merely debiting interest during the moratorium does not, by itself, make that amount overdue.:chatgpt-content-reference{index="6"}

Case 4: Interest Debited During Moratorium

A project loan has a valid interest-payment moratorium.

Interest is debited to the account during the moratorium period.

The correct conclusion is not that the account has automatically become overdue from the date of debit.

First determine the contractual due date for payment after the moratorium.

CC and OD Accounts: Meaning of “Out of Order”

RBI currently prescribes three important tests for a CC/OD account.

A CC/OD account is treated as out of order if:

1. the outstanding remains continuously above the sanctioned limit/drawing power for 90 days; or

2. the outstanding is below the sanctioned limit/drawing power but there are no credits continuously for 90 days; or

3. the outstanding is below the sanctioned limit/drawing power but the credits are not sufficient to cover the interest debited during the previous 90 days.

The “previous 90 days” for the third test includes the day for which the day-end process is being run. The definition also applies to other credit products structured as overdraft facilities.:chatgpt-content-reference{index="7"}

These three tests are among the most important CAIIB concepts in this subtopic.

Test 1: Continuous Excess over Limit or Drawing Power

Case 5: CC Account Continuously Excess

A borrower has a CC facility.

The outstanding remains continuously beyond the applicable sanctioned limit/drawing power for 90 days.

Even if:

• the business is functioning;

• sales are taking place; or

• the borrower promises to regularise shortly,

the account can satisfy the regulatory NPA condition.

The focus is the continuous irregular position.

Temporary Excess Is Different

A balance exceeding the limit for a short period does not automatically make an account NPA.

RBI specifically distinguishes temporary deficiencies from conditions that continue long enough to attract NPA classification.:chatgpt-content-reference{index="8"}

Therefore:

Temporary excess ≠ automatic NPA

but

Regulatory condition continuing for the prescribed period → NPA

Test 2: No Credits for 90 Days

Case 6: Outstanding Is Within Limit but No Credits

Suppose:

• CC limit is available;

• outstanding is below that limit; but

• no credits have come into the account continuously for 90 days.

It would be incorrect to say:

“The account is within limit, therefore it is standard.”

The account may be treated as out of order because absence of credits for 90 days is itself one of the RBI tests.:chatgpt-content-reference{index="9"}

This is a common statement-based CAIIB trap.

Test 3: Credits Do Not Cover Interest

A CC/OD account may contain regular-looking credits and still become out of order.

The important question is whether those credits are sufficient to cover interest debited during the relevant previous 90-day period.

Case 7: Regular Small Credits but Interest Not Serviced

Assume a CC account remains below limit.

The borrower makes several small deposits during the previous 90 days.

Therefore:

• the “no credits” test is not satisfied;

• but total credits are insufficient to cover the interest debited during that period.

The account can still be treated as out of order.

Drawing Power and Old Stock Statements

Drawing power is especially important in working-capital accounts.

RBI requires drawing power to be based on a current stock statement. Stock statements used for determining drawing power should not be older than three months.

Where drawing power is calculated using stock statements older than three months, the outstanding based on such drawing power is treated as irregular. If such irregular drawings are permitted continuously for 90 days, the working-capital account becomes NPA.:chatgpt-content-reference{index="10"}

Case 8: Business Is Running but Stock Statement Is Old

A CC borrower is operating normally and appears financially sound.

However:

• the stock statement used for DP is older than three months; and

• irregular drawings continue for 90 days.

The argument that “the unit is functioning well” does not prevent the regulatory consequence.

RBI specifically provides that such a working-capital account can become NPA even when the unit is working or the borrower’s financial position appears satisfactory.:chatgpt-content-reference{index="11"}

Expired or Unreviewed Limits

Another important working-capital case concerns renewal.

Regular and ad hoc limits should be reviewed or regularised within the prescribed regulatory framework.

Under the current Directions, an account where the regular or ad hoc credit limit has not been reviewed or renewed within 180 days from the due date/date of ad hoc sanction is classified as NPA.:chatgpt-content-reference{index="12"}

Case 9: CC Operations Are Regular but Limit Is Not Renewed

The borrower:

• has regular credits;

• services interest;

• remains within the operative limit; but

• the limit has remained unreviewed beyond 180 days from the due date.

The account can still become NPA because failure to renew/review within the regulatory period is an independent classification condition.

Temporary Deficiency vs NPA Condition

This distinction is important.

RBI states that an advance should not be classified as NPA merely because of temporary deficiencies such as temporary excess, inadequate DP, delayed stock statements or non-renewal exactly on the due date.:chatgpt-content-reference{index="13"}

The examiner may give one such deficiency and ask whether it immediately causes NPA status.

Security Does Not Decide NPA Status

Consider a term loan secured by property worth much more than the outstanding balance.

If the repayment-default criteria are satisfied, strong collateral does not normally prevent NPA identification.

RBI states that availability of security or the net worth of the borrower or guarantor should generally not be considered when deciding whether an advance is NPA, subject to specified exceptional provisions.:chatgpt-content-reference{index="14"}

Case 10: Fully Secured but Overdue

A borrower’s term loan is fully secured by valuable immovable property.

Principal and interest nevertheless remain overdue beyond the applicable NPA threshold.

The correct approach is to classify based on record of recovery, not the value of collateral.

Security becomes important for matters such as recovery and provisioning, but it does not normally cancel the basic NPA trigger.

Borrower-Wise, Not Facility-Wise Classification

Suppose a borrower has:

• one term loan;

• one CC account; and

• another funded facility with the same bank.

If one facility becomes NPA, RBI generally requires asset classification to be borrower-wise rather than facility-wise. All facilities granted by the bank to that borrower are subject to the borrower-wise principle, subject to specific regulatory exceptions.:chatgpt-content-reference{index="15"}

Case 11: Term Loan NPA but CC Account Regular

A borrower’s term loan becomes NPA.

The borrower’s CC account is still operating regularly.

A common mistake is to keep the CC facility standard because it is independently regular.

Under the borrower-wise principle, the bank must consider the NPA impact across the borrower’s facilities rather than isolating only the defaulting term loan.

Consortium Exception

In a consortium arrangement, each member bank considers its own record of recovery and other factors relevant to recoverability.

Therefore, the same borrower may not necessarily receive identical asset classification in every consortium member’s books at exactly the same time.:chatgpt-content-reference{index="16"}

Upgradation from NPA to Standard

An NPA cannot be upgraded merely because the borrower makes a small or temporary payment.

RBI requires the entire arrears of principal and interest to be paid before an NPA loan can normally be upgraded to standard.

Where the borrower has more than one credit facility with the same bank, the entire arrears relating to all credit facilities must be cleared before upgradation.:chatgpt-content-reference{index="17"}

Case 12: One Facility Regularised

A borrower has:

• a term loan; and

• a CC facility.

Both have been classified as NPA under the borrower-wise principle.

The borrower clears the complete arrears in the term loan but arrears continue in the CC facility.

The borrower cannot normally obtain standard classification merely by regularising one facility.

Credits Just Before the Balance-Sheet Date

A solitary credit just before the reporting date should not automatically be treated as proof that an inherently weak account has become regular.

RBI requires such accounts to be examined carefully. Where the available information shows inherent weakness, the account should be treated as NPA; genuine cases of regularisation must be supported satisfactorily.:chatgpt-content-reference{index="18"}

This rule helps prevent artificial regularisation or evergreening.

System-Based NPA Identification

NPA identification is not intended to depend on discretionary manual classification.

Under the current framework, all borrowal accounts, including temporary overdrafts, must be covered by the bank’s automated IT-based asset-classification system. The system should handle both downgrade and upgrade through straight-through processing, with asset status updated through the day-end process.:chatgpt-content-reference{index="19"}

For practical banking, correct data in the system is therefore critical.

Errors in:

• repayment schedules;

• due dates;

• moratorium periods;

• drawing power;

• sanctioned limits; or

• customer/facility mapping

can affect asset classification.

Practical Banking Application

When reviewing a stressed account at a branch, use a structured approach.

For a Term Loan

Check:

• contractual due dates;

• instalment amount;

• interest due;

• date and amount of actual recovery;

• uninterrupted period of overdue;

• valid moratorium, if any; and

• other facilities of the same borrower.

For CC or OD

Check:

• sanctioned limit;

• drawing power;

• daily outstanding;

• credits during the previous 90 days;

• interest debited during the period;

• age of stock statements;

• renewal/review date; and

• other facilities of the borrower.

This approach reduces classification errors and is also useful for CAIIB case-study questions.

CAIIB Exam Focus

1. Term Loan: Remember “More Than 90 Days”

The regulatory wording for a normal term loan is principal and/or interest remaining overdue for more than 90 days.

2. Overdue Starts from the Due Date

Do not add an imaginary grace period.

3. CC/OD Requires Three Separate Tests

Remember:

Excess → No Credits → Insufficient Credits

Any applicable out-of-order condition can matter.

4. Being Within Limit Does Not Guarantee Standard Status

A CC/OD may still be out of order because of no credits or insufficient interest servicing.

5. Temporary Excess Is Not Automatically NPA

Check duration and the exact regulatory condition.

6. Old Stock Statements Affect Drawing Power

A stock statement older than three months can make drawings irregular; continuous irregularity may lead to NPA classification.

7. Renewal Delay Has Its Own Rule

Do not confuse non-renewal on the due date with non-renewal beyond the prescribed period.

8. Classification Is Normally Borrower-Wise

Do not automatically isolate one facility from the borrower’s other facilities.

9. Security Does Not Cure Default

Strong collateral does not normally stop an otherwise applicable NPA classification.

10. Upgradation Requires Full Regularisation

Clearing only part of the overdue or only one facility may not satisfy the upgradation rule.

Common Exam Traps

Trap 1: “90 Days Have Passed, So the Term Loan Becomes NPA on the 90th Day”

The wording and day-end example must be applied carefully. RBI’s own illustration should guide the counting of the classification date.:chatgpt-content-reference{index="20"}

Trap 2: “CC Balance Is Below Limit, Therefore It Is Standard”

This ignores the no-credit and insufficient-credit tests.

Trap 3: “Some Credits Came During the Last 90 Days, Therefore the Account Is Regular”

Those credits may still be insufficient to cover the interest debited during the relevant period.

Trap 4: “One-Day Excess Makes a CC Account NPA”

A temporary excess does not by itself satisfy the 90-day continuous condition.

Trap 5: “Good Security Means the Account Cannot Be NPA”

NPA identification is principally based on performance and recovery, not collateral value.

Trap 6: “A Running Business Cannot Have an NPA CC Account”

A working unit can still meet regulatory NPA conditions.

Trap 7: “One Facility Is Regular, So It Remains Standard”

The borrower-wise principle can require classification of the borrower’s other facilities as NPA.

Trap 8: “One Payment Is Enough for Upgradation”

Full arrears of principal and interest must normally be cleared, including across all credit facilities of that borrower with the bank.

Memory Technique

For Term Loans, remember:

D → O → 90 → NPA

Due → Overdue → ageing beyond 90 days → NPA

For CC/OD, remember:

E – N – I

• E = Excess continuously

• N = No credits

• I = Insufficient credits for interest

These three checks quickly identify the main “out of order” situations.