A home loan becomes a Non-Performing Asset (NPA) when the borrower fails to make the scheduled payments for 90 consecutive days. This includes missing both principal and interest payments. Once the loan is classified as an NPA, it reflects a significant risk for the lender.
Timely repayment is essential for maintaining financial stability and a good credit score. However, lenders usually assess the situation before categorizing a loan as an NPA, considering any potential reasons for the delay. In this blog, we will explore how your home loan can become an NPA and discuss the available options to avoid it.
What Happens When a Home Loan Account Becomes an NPA?
When a home loan becomes an NPA, it can have severe financial and legal consequences for the borrower. Lenders closely monitor overdue payments, and once the non-payment period exceeds 90 days, the loan is officially classified as a non performing asset.
This causes a structured recovery process by the bank, which can ultimately lead to property seizure and auction.
Impact of NPA on Home Loan Borrowers:
| Factor | Impact on Borrower |
|---|---|
| Legal Notice & Recovery Process | Bank issues a notice demanding repayment. If dues remain unpaid, legal action may follow. |
| Impact on Credit Score & Future Loans | Borrower’s credit score drops significantly, making it harder to get future loans or credit approvals. |
| Property Auction & Financial Loss | If repayment isn’t made, the bank may auction the property, often at a lower value, causing financial loss. |
| Legal & Emotional Stress | Risk of losing property and legal proceedings can cause emotional distress. Seeking loan restructuring or financial advice can help. |
Note: To avoid these harsh consequences, it’s essential for borrowers to communicate with their lenders, explore repayment options, and take proactive steps before their home loan turns into an NPA.
Also Read: How to Increase CIBIL Score
What is Non Performing Assets?
Non performing assets (NPAs) refer to loans or advances given by banks or financial institutions that remain unpaid or overdue beyond a specified period. As per the Reserve Bank of India (RBI), a loan is classified as an NPA if the borrower fails to make principal or interest payments for more than 90 days.
These assets become non-productive as they stop generating revenue for the lender, impacting financial stability. NPAs are further categorized based on the duration of non-payment, influencing how banks handle recovery and provisioning.
Read More: RBI Repo Rate Cut 2025
What is the Gross NPA Ratio?
The Gross NPA Ratio measures the percentage of non-performing assets (NPAs) in a bank’s total loans. It reflects the proportion of loans that are not being repaid within 90 days, indicating the bank’s financial health and potential risk.
What is Net NPA?
Net NPA (Net Non-Performing Asset) is the value of bad loans remaining after deducting provisions for potential losses. It reflects the actual financial risk that banks face from non-performing assets.
What are the Three Types of NPA?
Non performing assets (NPAs) go through different stages based on how long they remain unpaid. Banks classify these stages to assess the risk level and take necessary actions for recovery. The three stages of NPAs help financial institutions manage bad loans and make provisions accordingly.
1. Substandard Assets
This is the first stage of an NPA, where the loan remains overdue for more than 90 days but less than 12 months. These assets carry a higher risk, but there is still a possibility of recovery. Banks closely monitor these loans and may offer restructuring options to prevent further deterioration.
2. Doubtful Assets
If a loan remains a substandard asset for over 12 months, it moves into the doubtful category. At this stage, the risk of default increases significantly, and banks face uncertainty regarding recovery. Financial institutions must set aside higher provisions for potential losses.
3. Loss Assets
A loan is classified as a loss asset when the bank, auditors, or RBI determine it to be irrecoverable, even if it hasn’t been fully written off in the books. These assets have little to no recovery value, and banks often write them off or sell them to asset reconstruction companies (ARCs) to minimize financial damage.
Also Read: How to Invest in a Distressed Property?
What are the Non-Performance Assets Examples?
Non performing assets (NPAs) occur when borrowers fail to repay loans on time, impacting banks and financial institutions. These defaults can arise in various sectors due to different economic and personal factors.
Case Study: Rahul’s Business Loan Default
Now, we will see the case of Amit who is a salaried professional and took a home loan of ₹30 lakh to buy an apartment. Unfortunately, he lost his job due to a company layoff, making it difficult to pay his EMIs.
For the first two months, he managed to use his savings, but after nonpayment for 90 days, the bank classified his home loan as an NPA.
| Borrower | Loan Type | Loan Amount | Reason for Default | Days Overdue | Bank Action |
|---|---|---|---|---|---|
| Amit (Salaried Professional) | Home Loan | ₹30 lakh | Job loss, no income source | 90+ days | Classified as NPA, legal notice issued, property auction initiated |
Common Examples of NPAs
| Type of Loan | Reason for Default | Example |
|---|---|---|
| Agricultural Loans | Crop failure, natural disasters, price fluctuations | A farmer unable to repay after a drought damages crops |
| Home Loan | Job loss, medical emergency, financial crisis | A person defaulting on a home loan after losing their job |
Also Read: Can We Construct a House on Agricultural Land?
Preventing NPA: Options for Borrowers on Verge of Default
When borrowers face financial difficulties of missing home loan EMIs for 90 days can lead to the loan being classified as a non performing asset. However, there are several options for borrowers which taken can avoid this situation and prevent legal repercussions.
| Step | Actionable Measures |
|---|---|
| 1. Contact the Bank Early | If facing financial hardship (job loss, medical emergency), inform the lender and request a temporary relief or restructuring. |
| 2. Use Loan Protection Policy | If insured, check if your policy covers EMI protection due to job loss or health issues. Some policies settle outstanding loans in case of the borrower’s death. |
| 3. Utilize Emergency Savings | Use emergency funds or liquidate fixed deposits to continue EMI payments and avoid default. |
| 4. Sell Low-Performing Investments | Withdraw from low-performing investments like mutual funds, stocks, PPF, or EPF to arrange funds for short-term EMI payments. |
| 5. Liquidate Personal Assets | Consider selling valuables like gold, gadgets, or vehicles to raise funds for EMIs. |
| 6. Borrow from Friends & Family | Seek an interest-free loan from close contacts as a temporary measure to keep the home loan on track. |
Read More: Legal Actions Taken on Home Loan Defaulters
Conclusion
A home loan turning into an NPA can have serious financial and legal consequences, impacting your credit score and future borrowing capacity. Understanding the stages of non performing assets, their impact, and available solutions can help borrowers take timely action to avoid default.
If you’re struggling with home loan repayments or need expert guidance, Credit Dharma offers tailored home loan solutions to help you regain financial stability. Don’t wait until it’s too late—explore your options today and secure your financial future!
Frequently Asked Questions
A home loan becomes a non performing asset (NPA) when EMI payments remain overdue for 90 consecutive days. After this period, the bank classifies the loan as an NPA and may initiate legal recovery or auction proceedings.
If a home loan remains unpaid, the borrower’s credit score drops, making future borrowing difficult. The bank may issue a legal notice, impose penalties, and eventually auction the property to recover the outstanding loan amount.
A home loan is considered an NPA if repayments are overdue for more than 90 days. Borrowers can check their loan status through their lender, bank statements, or credit reports to confirm if their loan is classified as an NPA.
Banks follow a structured recovery process for NPAs, including issuing legal notices, offering loan restructuring options, and ultimately auctioning the property if repayments are not made. Some NPAs are also sold to asset reconstruction companies (ARCs) for recovery.
For most loans, including home loans, the Reserve Bank of India (RBI) defines NPAs as loans overdue for 90 days. However, agricultural loans may have different criteria, depending on crop cycles and repayment terms.
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