What is NPA?
NPA stands for Non-Performing Assets. NPA is a prevalent term in the banks these days, which is given to the assets that have ‘ceased to generate income’. In simple words, the term ‘Non-Performing Asset’ refers to the loan or credit that has been provided to a bank customer and with respect to which one or more installments have remained due for a long time. Now, technically as the ‘asset’ has stopped performing or generating any income for the bank (lender), therefore it is called as a ‘Non-Performing Asset’. In a Banker’s language, it is said that the loans are in default. How do we actually decide if a loan should be classified as ‘non-performing’? A loan becomes a ‘Non-Performing Asset’ when the respective loan payment has not been done for more than 90 days. This period of 90 Days is the standard period of time. These ‘Non-Performing Assets’ are also termed as ‘bad loans’.
Types of NPA
A ‘Non-Performing Asset’ can be classified into various categories. NPA is categorized on the basis of the repayment status. Depending on the track record of an asset/ period of default/ risk factor/ we can classify the NPAs into various types as follows:
- Standard Assets: Standard Assets are ones with least risk. They carry normal risk as per the guidelines of banks. These assets are also in a position to generate some income for the bank. These are the type of assets where the borrower makes irregular payments and rarely on time.
- Sub-Standard Assets: Sub-Standard Assets are the ones which have been under the category of NPA for not more than 365 days. In the case of Sub-Standard Assets, the bank has to maintain 15% of the reserves.
- Doubtful Assets: Doubtful Assets are the ones which have been ‘non-performing’ for more than 365 days. Therefore, they can be said to carry a ‘more-than-normal’ risk and need extra attention from the bank.
- Loss Assets: As the term suggests, these type of assets only translate to losses for a bank. These assets have been non-performing for more than 3 years and is considered as ‘lost assets’. This implies that these assets can not be recovered.
Impact of NPA
Being assets that have become ‘non-performing’ or have stopped performing for the banks, NPAs are a matter of grave concern and continue to haunt the banking industry. India has been struggling with these Non-Performing Assets since few years now considering some unpleasant experiences for the banks. Let’s discuss how these non-performing assets affect the banks:
- The profitability of banks gets affected.
- The liquidity status of the banks gets compromised.
- Banks’ balance sheet also gets wrongly affected.
- Customer services may also indirectly get affected.
- May also affect the return rates for the shareholders.
- The banks’ interest rates may abnormally go higher.
Owing to the never-ending rise of NPA in India, Government took some stern steps with the intention to bring down the high rate of NPAs and cleaning the banks’ books. In the year 1991, Narsimhan Committee put forward its recommendations mentioning about various reforms to tackle NPAs. Some steps were taken to tackle the NPA issue as given below:
- SARFAESI Act, 2002 – Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (2002) acquires and disposes off the secured assets in all the NPA accounts which includes outstanding amount of Rs 1 Lakh & above.
- ARC – ARCs or Asset Reconstruction Companies were created with the aim of restructuring the bad loans of banks.
- DRT Act, 1993 – It is the Debt Recovery Tribunals Act which was created with the intention of reducing the time that is required usually to settle cases related to NPAs.
- Lok Adalat, 2001 – Lok Adalats were formed with the intention of handling and recovery of small loans. RBI has set the limit of Rs 5 Lakh for the loan amount.
NPA: India’s Situation
There is some good news for India with respect to Non-Performing Assets. As per the recent developments, the NPA percentage is on a decline which indicates that the banking sector is on the road to recovery with respect to the bad loans. There has been a sharp decline in the NPA percentage, as the gross NPA ratio moved down to 9.3 % in March 2019 from 11.5 % in March 2018. Thus, we can say that the issue of Non-Performing Assets will be resolved soon.
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