NPA loan settlement: what happens after 90 days of default

A loan generally becomes a non-performing asset (NPA) when interest or principal stays overdue for more than 90 days. NPA loan settlement means agreeing with the lender to close that account for a reduced, written amount. For the borrower, day 91 usually means more recovery activity, possible legal steps and a stronger mark on your credit report, and often a lender more open to talks. This guide is for borrowers who are close to NPA or already there, and explains what to do at each stage.

What is an NPA account?

An NPA account is a loan that has stopped performing for the lender. Under RBI's asset classification norms, a term loan is generally classed as an NPA when interest or an instalment of principal remains overdue for more than 90 days. Banks and NBFCs report the status to credit bureaus, and it shapes how the account is handled from then on. It is the lender's classification. It does not, on its own, mean a court case has started against you.

SMA and DPD: the stages before NPA

DPD means days past due: how many days a payment has been late. Before NPA, lenders use special mention account (SMA) stages to flag early stress. These are the stages for term loans.

Cash credit and overdraft accounts work differently. They are tested on whether the balance stays above the limit or drawing power. If you hold one for your business, ask your bank how it classifies your account.

What changes for you on day 91?

• Your file moves from reminders into recovery or a specialised team.
• Your credit report shows heavier DPD numbers, and the account can later show as SUB (substandard), DBT (doubtful) or LSS (loss).
• Interest and charges may keep running in the amount the lender claims.
• Legal notices become more likely, and for a secured loan, recovery of the asset may begin.
• The lender may be more open to settlement than when the account was only slightly late.

Day 91 does not mean a police case, a seizure of your household goods or immediate jail. Agents who say so are usually trying to frighten you. Nobody can take your things from your home without legal authority, and recovery must follow RBI's conduct rules throughout.

After NPA: secured and unsecured loans

Secured loans: home, property and some business loans

For a secured loan, a bank can act under the SARFAESI Act once the account is an NPA, without first filing a civil suit. It sends a notice under Section 13(2), and you get 60 days to pay. You may send a written objection, and the lender must reply. If nothing is resolved, the lender can take possession and later auction the asset, subject to the law's steps. Do not ignore this notice.

Unsecured loans: personal loans and credit cards

There is no asset to take. Lenders usually use calls, agencies, legal notices, arbitration, Lok Adalat or civil courts. For amounts of ₹20 lakh or more, banks may go to a Debts Recovery Tribunal. Separately, a bounced cheque or mandate can bring a Section 138 or Section 25 notice, which has strict deadlines.

How to get out of NPA: pay or settle

You have two main routes. To bring the account back to standard, you normally have to clear all the arrears of interest and principal. Paying one or two EMIs generally will not do it. If you cannot manage that, a settlement closes the account for an agreed amount, under the RBI's June 2023 framework and the lender's own policy.

Steps for NPA loan settlement

1. 1Get a statement showing principal, interest and charges, and ask what your account's current status is.
2. 2Work out what you can raise as a lump sum.
3. 3Write to the collections or settlement team, with proof of your hardship.
4. 4If you have a Section 13(2) or other notice, reply to it separately and on time.
5. 5Get the offer on letterhead, with the amount, the deadline and that nothing more is due.
6. 6Pay only into the lender's official account, and keep the receipt.
7. 7Collect the No-Dues Certificate, and for a secured loan, your original property papers and release of the charge.

How much do you pay in NPA loan settlement?

There is no fixed figure. Our working estimate at Legal Savvy for unsecured loans is a reduction of 65% to 80%, so paying about 20% to 35%. It varies from bank to bank, and your lender makes the final decision. Secured loans work differently because the lender also has the asset's value to consider. Try your numbers in our free calculator.

What about the effect on CIBIL?

NPA status and late payments already pull your score down. A settlement replaces the ongoing default with a 'Settled' mark, which also harms your score for a period. Paying arrears, or closing in full, generally looks better if you can do it. The same lender also cannot give you fresh non-farm credit for at least 12 months after a settlement, under RBI's framework, and may set a longer period.

Mistakes to avoid once your loan is an NPA

• Ignoring letters because you cannot pay. A reply costs little, and a missed deadline can cost a lot.
• Making small token payments with no plan, which may not change your status and can affect limitation.
• Signing an acknowledgement or fresh document without reading it.
• Paying an agent in cash or on a personal UPI ID.
• Moving or selling a secured asset to avoid recovery, which can create new legal trouble.
• Believing that a write-off in the bank's books means you owe nothing.

NPA on a business loan

Business borrowers face a few extra issues. A personal guarantee can make you liable as an individual, and a cash credit or overdraft is tested differently from a term loan. Micro, small and medium enterprises may also have separate revival options, so ask your bank about them before you settle. Keep your financial statements, GST returns and order book ready, since these show whether your hardship is real and what you can pay.

Why borrowers choose Legal Savvy for NPA accounts

Legal Savvy is a legal expert-led loan settlement and debt relief company, headquartered in Madhapur, Hyderabad, that has helped 23,000+ borrowers across India. Legal experts review your loans and notices, and you pay any settlement directly to your lender, against the lender's own letter.

An NPA account often has several things happening at once. Our legal experts deal with the notices, the talks and any recovery harassment together, so nothing misses its deadline.

Conclusion: act before the notices pile up

An NPA is a serious stage, but not the end. Find out exactly where your account stands, answer every genuine notice in time, and choose between clearing the arrears and NPA loan settlement based on what you can really pay. Our legal experts can review your papers and tell you where you stand.