Non-Performing Asset (NPA)

A Non-Performing Asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principle has remained ‘past due’ for a specified period of time. In simple terms, an asset is tagged as non performing when it ceases to generate income for the bank.

A non-performing asset (NPA)is a loan or an advance where;

• Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan,
• The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
• The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
•  The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops.
• The installment of principal or interest thereon remains overdue for one crop season for long duration crops.
• Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
• Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.
• No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days

‘Out of Order’ status

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

 ‘Overdue’

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank

Further classify non-performing assets into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

1.   Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.

2.   Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.

3.   Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.

Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.

Reasons For NPA

NPAs result from what are termed “Bad Loans” or defaults. Default, in the financial parlance, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons:

·         Usual banking operations /Bad lending practices

·         A banking crisis (as happened in South Asia and Japan)

·         Overhang component (due to environmental reasons, natural calamities, business cycle, Disease Occurrence.

·         Incremental component (due to internal bank management, like credit policy, terms of credit, etc...)

Effect of NPA

NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

·         Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate NPA losses

·         Bank shareholders are adversely affected

·         Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments.

Ref: Master circular RBI, Wikipedia