How to automate NPA classification in an NBFC
CA Himanshu Sharma · How-to · 2026-08-12 · 9 min read (estimated)
To automate NPA classification, compute days-past-due every night from the account's own due events, derive SMA and NPA staging from that number, and remove every path by which a human can set the classification directly. That is the whole of it — and the difficulty is not the ninety-day arithmetic, it is making sure the number the classification reads and the number the statement reads are the same number.
This is a practical guide: what to compute, in what order, what to check, and where implementations usually break.
What has to be computed, and when?
The RBI's clarification of 15 November 2021 on prudential norms on income recognition and asset classification put the timing beyond argument: an account is flagged overdue as part of the day-end process for the due date itself. Not the next morning, not on the reporting date, not when somebody opens a report.
That single sentence decides the architecture. Classification is a scheduled job, not a request-time computation. If it runs when asked, two people asking at different times get different answers, and the one who asked at quarter-end gets the one that goes in the return.
The nightly sequence that works:
- Apply money already held. Any advance or unapplied receipt sitting on the account is set
against instalments that have now fallen due — before anything is judged overdue. A borrower who paid ahead must not be marked overdue on a due their own money covers.
- Recompute days-past-due for every live account, from the oldest unpaid due event.
- Derive the stage from the DPD.
- Apply income recognition consequences of any account that has just crossed into NPA.
- Levy penal charges — after classification, so an account that turned NPA overnight is handled
on its new basis in the same run.
- Write the day's position for reporting.
Order matters in both directions. Applying advances after classification marks a paid-up borrower overdue; levying penal before classification charges an account that should have stopped.
What counts as overdue?
An amount is overdue when it was not paid on the date the lender fixed for it. Two consequences that systems get wrong:
Accrued is not due. Interest that has accrued but has not yet been demanded is not overdue. This is what makes an interest-servicing or bullet product behave correctly — the clock starts on the date the sanction says money is payable, not on the date interest began to build.
Grace does not move it. A lender may choose not to levy a penal charge for the first few days of a default. That is a commercial decision about a charge. It does not change the date the amount became overdue, and it must not delay classification, SMA staging, NPA or the DPD reported to the credit bureaus. Two separate settings, never one doing both.
What are the stages?
| Stage | Days overdue | Note |
|---|---|---|
| Standard | 0–90 | Performing. The three SMA buckets below are sub-divisions of it, not stages after it |
| SMA-0 | 1–30 | Early warning. Not impairment |
| SMA-1 | 31–60 | A second cycle missed. Still standard, still accruing income |
| SMA-2 | 61–90 | Reported to CRILC for large borrowers |
| Sub-standard (NPA) | > 90 | The first non-performing stage. Income moves to a receipt basis |
| Doubtful | 12 months as sub-standard, 18 in the Base Layer | Sub-categorised by further ageing — up to a year, one to three, beyond three |
| Loss | Identified as such | No waiting period. An auditor or an inspection can name it at any stage |
The upgrade rule that catches most systems out
An account classified as NPA is upgraded to standard only when the entire arrears of interest and principal are paid. Not when a payment brings the DPD below ninety. Not when the oldest instalment is settled.
Many systems implement classification as a pure function of DPD in both directions, which quietly upgrades an account the moment a part-payment moves the oldest unpaid due forward. That is the wrong answer, and it is the wrong answer in the direction that flatters the book.
The implementation is a one-way gate: DPD determines downgrade; full clearance of arrears determines upgrade.
One engine, not one per product
The most damaging design error is a per-product classification path — a gold engine and a term-loan engine, each with its own idea of what is overdue.
Products differ in the due events they generate, not in how days-past-due is counted. A term loan generates instalments. A gold loan generates interest-servicing dates and a maturity. A demand loan generates a maturity. Feed all of them into one engine and every product classifies identically. Give each its own path and they diverge — usually silently, usually for years, and usually discovered by somebody outside the company.
A specific case worth checking: does a gold loan in your system generate any due event at all? Where gold is treated as having "no schedule", the classification engine finds nothing unpaid and the account reads as current forever, however far past maturity it is.
What happens to income at classification?
Crossing into NPA is not only a label. Interest accrued but not collected must be reversed out of income into a suspense account, and from that date interest is recognised only as it is received.
The half that is usually missing is the second one. The reversal happens because it shows in the P&L; the receipt-basis recognition does not, because nothing forces it. The symptom is a suspense balance that only ever grows while the borrower's payments reduce principal.
Test it: take an NPA account with interest in suspense, post a payment, and check that it meets the suspended interest before principal, that suspense falls, and that income is recognised on the date of receipt.
How to check your own system
Six questions, in ascending order of how much they reveal.
- Where did this DPD come from? You should be able to see the unpaid due events it was computed
from, not just the number.
- Can anyone type a classification? If yes, the classification and the ledger can disagree, and
one day they will.
- Take an account to 91 days and check the ledger. Was accrued interest reversed to suspense?
- Pay that account. Is income recognised on receipt, or did the money go to principal?
- Part-pay an NPA account until DPD falls below 90. Did it upgrade? It should not have.
- Compare a gold loan and a term loan, both 100 days overdue. Same DPD, same stage, same
treatment? If not, you have two engines.
A worked example
A gold loan of ₹3,00,000 is disbursed on 15 January with monthly interest servicing. The borrower pays nothing.
- 15 February — the first servicing due date passes unpaid. Day-end that night: DPD 1, SMA-0.
- 17 March — DPD 31, SMA-1.
- 16 April — DPD 61, SMA-2. If this borrower is a large exposure, it goes to CRILC at this stage.
- 16 May — DPD 91. The account becomes sub-standard. That night, the interest accrued since
disbursement — about ₹23,000 at 1% a month — is reversed out of income into suspense.
- June — the borrower pays ₹23,350, clearing the interest. It meets the suspended interest first,
suspense goes to nil, and income of ₹23,350 is recognised on the date of receipt. The arrears of interest are now fully paid, so the account upgrades to standard.
Note what did not happen: the account did not upgrade in May when a partial payment might have moved the DPD, and the reversed interest did not vanish — the borrower still owed it, and paying it recognised it.
Common mistakes
- Classifying on demand rather than at day-end. Different answers depending on when you ask.
- An editable classification field. The ledger and the label diverge.
- Upgrading on DPD. Flatters the book; contrary to the 2021 clarification.
- Penal grace delaying classification. Two settings, one purpose each.
- A product with no due events. It can never be overdue, so it can never be NPA.
- Reversing interest but never recognising it on receipt. Understates income permanently.
- Applying advance payments after classification instead of before. Marks paid-up borrowers
overdue.
How Lenviq handles this
One classification engine serves every product and takes no per-product branch — products differ only in the due events they generate. Classification runs in the day-end job, after held advances are applied and before penal is levied. The DPD on the screen can be traced to the due events it came from. Upgrade requires arrears cleared in full, not a DPD below ninety. On classification, accrued interest is reversed to suspense and from that date receipts meet suspended interest before principal, recognising income on the date the money arrives.
The positions and their citations are on the compliance page.
Frequently asked questions
Can NPA classification be run weekly instead of nightly?
No. The 2021 clarification requires the overdue flag to be applied in the day-end process for the due date itself, which makes the ninety-day count start on day one. A weekly run means an account can be up to six days into a default before the system notices, and the DPD reported to the bureaus is wrong by the same amount.
Does a penal charge grace period delay NPA classification?
It must not. A grace period is a commercial decision about when to levy a charge. The date an amount became overdue is fixed by the sanction, and classification, SMA staging and bureau reporting all run from that date regardless of whether a charge was levied.
When can an NPA account be upgraded to standard?
Only when the entire arrears of interest and principal are paid. A part-payment that reduces days-past-due below ninety does not upgrade the account, which is a change many systems built before November 2021 never implemented.
How should gold loans be classified?
On the same basis as everything else — ninety days past due. The gold directions contain no separate asset-classification rule. What differs is the due events: a gold loan generates interest-servicing dates and a maturity rather than instalments, and every gold loan falls wholly due at maturity whatever else the scheme demands.
What is the difference between SMA and NPA?
SMA is an early-warning classification for accounts overdue up to ninety days, in three stages (SMA-0, 1 and 2). NPA begins after ninety days and carries the income recognition and provisioning consequences. SMA status for large borrowers is reported to CRILC, which is why the staging matters operationally even though it is not impairment.
Related reading: RBI compliance for NBFCs · Classification is a day-end event · Income reversal on NPA · What SMA signals
Want to see the classification traced back to the rows it was computed from? Ask for a walk-through.
Read next
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- NBFC income recognition: what the RBI rules require once an account turns bad
Why accrued interest is reversed at classification, what receipt basis means in the ledger, and the half of the rule most systems never implement.
- The Key Facts Statement: what an NBFC must disclose, and what it costs to get wrong
What goes into a KFS, how the APR is computed, and the clause that stops a lender recovering a charge it failed to disclose.
From the people who wrote this
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