Context:
The Reserve Bank of India (RBI) has revised rules on classification, definition, and recovery of bad loans to align with global standards, effective April 1, 2027. The new norms tighten NPA classification and mandate automated identification systems.
- Non-Performing Asset (NPA) refers to a loan given by a lending institution where interest or principal remains overdue for more than 90 days, indicating credit stress.
- Banks classify assets into standard, sub-standard, doubtful, and loss assets based on repayment performance and risk.
- Earlier, banks could treat different loans of the same borrower separately, allowing evergreening of loans to avoid NPA classification.
- This weakened prudential norms and reduced transparency in the banking system.
- The revised rule mandates borrower-level classification, where default in one loan makes all credit facilities of that borrower NPAs.
- RBI has also mandated automated NPA identification systems to ensure uniform and timely recognition.
- These reforms align with global banking standards (Basel norms) and aim to strengthen financial stability.
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RBI NPA Norms: Strengthening Credit Discipline Framework