Table of Contents
- What is an NPA and Why It Matters
- RBI Norms for NPA Classification
- How to Calculate NPA Status – Step-by-Step
- Special Rules for OD/CC Accounts
- How Banks Manipulate NPA Reporting – Methods & Motives
- Case Studies: Realistic Scenarios (Explained Simply)
- Case 1: Reversing Interest to Delay NPA
- Case 2: Evergreening Using Fresh Loans
- Case 3: Circular Fund Movement
- Case 4: Moratorium Misuse
- How Auditors & RBI Catch Manipulations
- Red Flags Every Auditor & Analyst Must Watch
- Impact of Manipulated NPAs on the Economy
- FAQs
- Conclusion – Towards Ethical Banking
1. What is an NPA and Why It Matters
A Non-Performing Asset (NPA) is a loan where the borrower has not paid interest or principal for over 90 days. NPAs indicate a risk of default, and if not recognized correctly, can hide serious financial stress in the banking system.
Why is it important?
- Shareholders rely on reported financials.
- Regulators base oversight and monetary policy on NPA data.
- Auditors and analysts use it to assess bank stability.
- Common people (depositors) need transparency.
2. RBI Norms for NPA Classification
RBI’s Income Recognition and Asset Classification (IRAC) norms say a loan becomes NPA when:
- Term Loan: Interest or installment overdue >90 days
- Overdraft/Cash Credit (OD/CC): Account is out of order for 90 days
- Bills Purchased/Discounted: Overdue for 90 days
Further Classification:
- Substandard Asset: NPA for <12 months
- Doubtful Asset: NPA for >12 months
- Loss Asset: Identified as irrecoverable
Banks must make provisions depending on classification.
3. How to Calculate NPA Status – Step-by-Step
Let’s say a borrower’s EMI was due on January 10 and hasn’t paid till April 11.
Step-by-Step:
- Due Date Missed: Jan 10
- Count 90 calendar days
- NPA starts on Day 91 = April 11
- Bank must stop accruing interest and make provisions.
Partial payments do not reset the clock unless the entire overdue amount is cleared.
4. Special Rules for OD/CC Accounts
In overdraft or cash credit accounts, the 90-day rule is based on “out of order” status:
- No credits for 90 days
- Balance exceeds sanctioned limit
- Interest not serviced for 90 days
The entire account is treated as NPA, even if minor interest is unpaid.
5. How Banks Manipulate NPA Reporting – Methods & Motives
Banks face huge pressure to show low NPAs at year-end. Managers may try to:
- Avoid provisioning (which hits profits)
- Impress investors and regulators
- Protect personal performance ratings
Here are the popular manipulation techniques:
| Technique | Description |
|---|---|
| Evergreening | Giving new loan to pay off an old one |
| Backdating Receipts | Entering payments in past date to avoid crossing 90 days |
| Reversing Interest | Temporarily removing interest entries |
| Circular Lending | Borrower deposits money only to withdraw it again |
| System Overrides | Using internal codes to prevent NPA flag in CBS |
| Temporary Settlements | Using cheques or internal transfers to show “repayment” |
6. Case Studies: Realistic Scenarios (Explained Simply)
Case 1: Reversing Interest to Delay NPA
Bank: PSU Bank, Delhi Branch
Borrower: SME with ₹5 Cr OD limit
Problem: Borrower had no business in Q4 and account was out of order.
What Bank Did:
- On Day 89, staff reversed interest (₹4.5 lakhs) from the system
- So system didn’t show any interest due = No NPA triggered
- Auditor found that reversal was done manually via staff login
Layman Explanation: Imagine your bank says you haven’t paid credit card dues for 3 months. Instead of reporting it, they say “Oh, let’s just pretend interest wasn’t charged.” It looks clean, but you still owe them. That’s what happened here.
Case 2: Evergreening Using Fresh Loans
Bank: Private Bank, Mumbai
Borrower: Builder with ₹10 Cr loan, struggling due to unsold flats
What Bank Did:
- Gave new loan of ₹2 Cr as “Working Capital”
- Borrower used it to pay 2 missed EMIs on old loan
- On paper, EMIs were paid → Account stays “Standard”
Layman Explanation: You borrowed ₹100 from your friend and missed payments. So he gives you ₹10 more, and you pay back part of the old ₹100 from the new ₹10. Technically, you’re repaying, but it’s all internal — no new money came from your income.
Case 3: Circular Fund Movement
Bank: Co-operative Bank in South India
Borrower: Trader with ₹1 Cr loan
What Happened:
- Bank insisted borrower deposit ₹5 lakhs on March 30
- That amount was transferred from another borrower’s account, who received ₹5L loan the same day
- Money came, stayed for 1 day, and withdrawn next day
Layman Explanation: This is like two shopkeepers helping each other. “You lend me ₹10 today so I look good, I’ll give it back tomorrow.” But nothing was really earned or repaid. Banks sometimes help borrowers rotate funds just before year-end to dodge NPAs.
Case 4: Moratorium Misuse
Bank: NBFC with multiple microfinance clients
Context: RBI allowed COVID moratorium in 2020–2021
Misuse Detected in FY 2024–25 Audit:
- Bank still continued moratorium flags in system for accounts no longer eligible
- EMI not paid for 120 days, but flagged as “under relief”
Layman Explanation: Imagine RBI says you don’t have to pay your EMI for 3 months. But the bank lets you skip it for 6 months — even after the rule expired. That gives the illusion you’re not defaulting, but you are.
7. How Auditors & RBI Catch Manipulations
Auditors and regulators use several techniques to catch manipulations:
- CBS Audit Trails: Every entry, edit, reversal has a user ID and timestamp
- Bank Statements of Borrowers: Check if payments came from outside funds
- Comparative Balance Checks: Sudden clean-up at March 31? Red flag!
- Fresh Loans Log: If many new loans are issued near quarter-end
- EMI Holiday Tracker: Is the system still giving relief after scheme expired?
RBI’s risk-based inspections often target branches with:
- Sudden NPA dips
- Multiple restructured accounts
- High loan roll-overs
8. Red Flags Every Auditor & Analyst Must Watch
- Spike in temporary deposits in late March
- Backdated accounting entries in CBS
- High number of new sanctions to old borrowers
- Mismatch between account status and payment history
- Manual overrides used frequently
- Accounts “regularized” just before audit period
Even if branch managers present “supporting documents,” auditors must ask:
Did real cash flow happen? Or just book entries?
9. Impact of Manipulated NPAs on the Economy
- Distorted Risk Perception: Banks look healthier than they are
- Credit Misallocation: Good borrowers suffer as banks over-lend to weak ones
- Stock Market Mispricing: Investors make decisions based on fake health
- Delayed Resolution: NPAs grow bigger when ignored
- Fiscal Risk: Government may step in to recapitalize banks using taxpayers’ money
10. FAQs
Q1: What if partial payments are made within 90 days?
Partial payments do not change the NPA status unless the entire overdue amount is cleared.
Q2: Can banks restructure loans instead of declaring NPA?
Yes, but only under specific RBI schemes and with clear disclosures. Unofficial restructuring = violation.
Q3: Can interest reversal be justified?
Only if the interest was wrongly charged. Reversing it to avoid NPA triggers is manipulation.
Q4: Is this only an Indian issue?
No. Globally, banks face NPA manipulation issues — especially in emerging markets.
11. Conclusion – Towards Ethical Banking
NPA norms exist to protect the banking system from collapse. When banks manipulate these figures, they delay the inevitable and transfer risk to others – including depositors, investors, and the government.
The solution lies in:
- Stronger internal audits
- Transparent disclosures
- Stricter enforcement by RBI
- Whistleblower protection
- Automation with limited override rights
As India moves towards Expected Credit Loss (ECL) and IND-AS compliance, the window for manipulations is shrinking – but vigilance is still the key.
Stox N Tax 
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