Regulatory
Upgrading an NPA: why a borrower who pays a lot is still non-performing
CA Himanshu Sharma · 2026-10-09 · 5 min read (estimated)
A borrower three instalments behind pays two of them. The account is no better off. Not a little better, not partially upgraded — non-performing, exactly as it was, and it stays that way until the third one arrives too.
This is the rule most lenders can state and most systems get wrong, because stating it and implementing it are different problems. Classification runs downhill on its own and only comes back up through one gate.
The rule, and where it comes from
The Reserve Bank's clarification on income recognition, asset classification and provisioning (RBI/2021-2022/125, DOR.STR.REC.68/21.04.048/2021-22, dated 12 November 2021) settled it: an account classified as non-performing may be upgraded to standard only when the entire arrears of interest and principal are paid.
Three words carry the whole thing.
"Entire" — not the oldest overdue instalment, not the amount that would bring days-past-due under ninety, not a negotiated part. All of it.
"Arrears" — what was demanded and is unpaid. Not the outstanding principal; a borrower does not have to repay the loan to upgrade, only to stop being behind on it.
"Interest and principal" — both legs. An account whose principal arrears clear while interest arrears remain is still non-performing.
Why this is a one-way gate, and not a threshold
The asymmetry is the point and it is deliberate.
Going down is arithmetic: ninety days past due, computed in the day-end process for the relevant date. Nobody decides it; the calendar does.
Coming up is a payment event, and it is all-or-nothing. There is no gradient — no partial upgrade, no SMA-2 on the way back, no "improving" state between NPA and standard.
So a system that treats classification as a function of current DPD will upgrade an account the moment arrears fall under ninety days, which is the single commonest implementation defect in this area. DPD going down does not upgrade anything. Only full payment of arrears does.
What it looks like on a real account
A ₹5,00,000 loan, ₹18,000 a month, three instalments overdue at month end. The account is NPA.
| Arrears before | Paid | Arrears after | Classification | |
|---|---|---|---|---|
| Pays one instalment | ₹54,000 | ₹18,000 | ₹36,000 | still NPA |
| Pays two | ₹54,000 | ₹36,000 | ₹18,000 | still NPA |
| Pays ₹53,900 | ₹54,000 | ₹53,900 | ₹100 | still NPA |
| Pays all three | ₹54,000 | ₹54,000 | nil | standard |
The third row is the one worth looking at twice. A hundred rupees of unpaid interest holds a ₹5,00,000 account in NPA, and it is correct that it does — "entire" has no materiality threshold attached to it.
And the day it upgrades is a day-end, not the moment the money lands. Classification is computed in the day-end process for the relevant date, so an account whose arrears clear at 2pm is standard from that day's day-end, not from 2pm — why that distinction matters.
The three things that go wrong in systems
1. Upgrading on DPD. The account's DPD falls below ninety after a part payment and the status flips. This is the defect to look for first, and the test is the third row of the table above: pay all but ₹100 of arrears and see what the account says at day-end.
2. Appropriating the payment so that "arrears" become something else. A receipt that settles charges and penal before interest and principal can reduce the amount outstanding without clearing the arrears. Whether an account's arrears are nil depends on which demands the money was applied to, so the appropriation order and the upgrade test have to be reading the same rows.
3. Reading a counter rather than the due events. If "is this account in arrears" is answered by a flag that something else maintains, the flag and the classification can disagree. They should be derived from the same place — the demands raised and what has been paid against them.
What upgrading does not do
It does not undo the income reversal. Interest accrued and reversed to suspense at classification stays reversed; what changes is that income recognition returns to accrual basis from the upgrade. The reversal is a completed event, not a suspended one — what happens to income on classification, and the entries in both directions.
It does not erase the provision retrospectively. The provision held while the account was non-performing was correct when it was held.
It does not reset the history. The account was non-performing, the credit information companies were told so, and the upgrade is a new fact rather than a correction of an old one.
The question worth asking your own system
Take a non-performing account and pay all of its arrears except one rupee. Run the day-end.
If it upgrades, the system is testing a threshold rather than the rule, and every account it has ever upgraded on a part payment was upgraded wrongly — which is a reporting problem, not only a classification one, because the DPD that went to the bureaus went with it.
Frequently asked questions
Does paying most of the arrears upgrade an NPA?
No. The Reserve Bank's November 2021 clarification requires the entire arrears of interest and principal to be paid. There is no materiality threshold and no partial upgrade — an account one rupee short of clear is still non-performing.
Does the borrower have to repay the whole loan to upgrade?
No. Arrears are what was demanded and remains unpaid, not the outstanding principal. A borrower who brings every overdue instalment current upgrades while still owing the rest of the loan on schedule.
If DPD falls below 90, does the account become standard?
Not by itself. Days past due govern the classification downwards; coming back requires payment of the entire arrears. A system that upgrades on DPD alone is implementing a threshold rather than the rule.
When exactly does the upgrade take effect?
At the day-end for the date the arrears were cleared, because classification is computed in the day-end process for the relevant date rather than at the moment a receipt is posted.
Does upgrading reverse the income that was moved to suspense?
No. The reversal stands; what changes is that income recognition returns to accrual basis going forward.
Related: Classification is a day-end event · What happens to income when an account turns · How to automate NPA classification · SMA classification and what it signals · NPA date calculator
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