Doubtful asset
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A doubtful asset is a bad loan (NPA) that has stayed in the sub-standard category for 12 months. Under RBI's IRAC norms, a loan becomes an NPA when it is overdue for more than 90 days. It is first called sub-standard. If it stays unpaid, it becomes doubtful. Recovery is now uncertain, so banks must set aside more money to cover it.
Doubtful assets have three stages, based on time spent in the doubtful class:
- D1: up to 1 year. Provision on the secured part: 25%
- D2: 1-3 years. Provision on the secured part: 40%
- D3: over 3 years. Provision on the secured part: 100%
The unsecured part must be 100% provided in every stage.
Example
A Rs 10 crore loan turned NPA in April 2023 and remained sub-standard until April 2024, when it became D1. Say Rs 8 crore is covered by collateral. The bank must provide 25% of Rs 8 crore (Rs 2 crore) plus 100% of the unsecured Rs 2 crore, a total of Rs 4 crore.
Don't confuse with
- Loss asset: identified as uncollectible by the bank, its auditors or RBI inspection. A doubtful asset is still seen as partly recoverable.
Related concepts
- Standard asset
- Special Mention Account
- Non-Performing Asset
- Sub-standard asset
- Loss asset
- Gross and net NPA
- Loan loss provisioning
- Provisioning Coverage Ratio
- Stressed assets
- Expected Credit Loss provisioning