Sub-standard asset
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A sub-standard asset is a loan that has been an NPA for up to 12 months. An NPA (non-performing asset) is a loan on which interest or principal has been overdue for more than 90 days. Sub-standard is the first step on the bad-loan ladder. The borrower is in trouble, but recovery is still reasonably possible. Banks must provide 15% of the amount, or 25% for unsecured exposures. If the loan stays sub-standard for 12 months, it becomes a doubtful asset.
Example
A trader stops repaying a Rs 2 crore secured business loan. After 90 days overdue it becomes an NPA and is classed as sub-standard. The bank must set aside 15%, or Rs 30 lakh.
Don't confuse with
- SMA-2: a loan 61-90 days overdue is still a standard asset under early watch. It becomes sub-standard only after crossing 90 days.
- Doubtful asset: a loan that has been sub-standard for 12 months. It needs higher provisions.
Related concepts
- Standard asset
- Special Mention Account
- Non-Performing Asset
- Doubtful asset
- Loss asset
- Gross and net NPA
- Loan loss provisioning
- Provisioning Coverage Ratio
- Stressed assets
- Expected Credit Loss provisioning