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Commercial banks have a wide range of assets. The term “performing assets” (or PA) refers to all assets that generate recurring revenue. Non-Performing Assets, or NPA in banking, as the full form of NPA depicts, are any assets that do not create a regular stream of revenue (NPA). In other words, when a person does not repay or return the money borrowed from a creditor, the loan is classified as nonperforming in the eyes of financial institutions. There is no assurance that the money given to the borrower will be returned to the lender. Such assets are called Non- Performing Assets or NPA in banking.
Causes of NPA
Willful defaulters are one of the causes of NPA in banking. A willful defaulter is someone who has failed to satisfy their lender’s payment/repayment commitments despite the fact that they are capable of doing so. Kingfisher Airlines Ltd is one of the greatest examples of deliberate defaults.
One of the extrinsic factors impacting NPAs in the nation is the industrial crisis. Banks are relied upon by industries to meet their project financial needs. In the event of a financial crisis, the banking system will shift, and NPAs will grow.
One of the main causes of escalating NPAs is the lender’s lax standards. One of the causes is that banks over-analyze financial positions and credit ratings for industry barons.
NPAs are also caused by debtors misusing funds. Some borrowers pay bribes to bank authorities in order to obtain a loan authorized with the explicit goal of defaulting.
Types of NPA
Based on the length of time the asset has been non-performing and the reliability of the dues, there are four types of NPA:
Standard Assets: These are usually considered the performing assets. Standard assets produce a steady stream of income and repayments when they become due. These assets have a typical risk profile and are not NPAs in the traditional sense. As a result, Standard Assets do not require any additional provisions.
Sub-Standard Assets: A Sub-Standard asset is one that has been non-performing for more than 90 days but less than 12 months. It is an asset wherein the bank must keep 15% of its reserves.
Doubtful Assets: These are those that have been overdue for longer than a year. The collecting of such advances is very speculative, and there is a slim chance that the loan balance will be repaid to the party. Such advances threaten the bank’s liquidity and reputation.
Loss Assets: These are the assets that are questioned by the bank, internal or external auditors, or central bank inspectors and are deemed non-recoverable. The bank has determined that the loan amount cannot be collected, either by itself or by an external or internal auditor; therefore, the bank must record a loss on its balance sheet.
The scenario of NPA in India
When compared to their private-sector counterparts, India’s public sector banks are the most hit by Non- Performing Assets (NPA). State Bank of India has the most Non- Performing Assets (NPAs) among the main public sector banks, with about INR 1.86 lakh crore, followed by Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank, and Union Bank of India.
ICICI Bank has the most Non- Performing Assets (NPAs) among India’s private sector banks, followed by Axis Bank, HDFC Bank, and Jammu & Kashmir Bank.
Effective steps should be adopted by banks and other financial institutions to decrease the consequences of NPA in banking, which stifle bank economic development due to inadequate fund recycling, which has a negative impact on credit deployment and bank soundness.
It is critical for both the borrower and the bank to understand the difference between performing and non-performing assets. If the asset is non-performing and interest payments are not paid, the borrower’s credit and development opportunities may be harmed. It will therefore make it more difficult for them to get future loans.
Interest received on loans is a major source of income for the bank or lender. As a result, non-performing assets will have a detrimental impact on their capacity to generate sufficient revenue and, as a result, on their overall profitability.
Conclusion
It is critical for banks to maintain track of their non-performing assets (NPAs) since having too many NPAs can have a negative impact on their liquidity and ability to grow.
Non-performing assets (NPAs) can be managed depending on how many there are and how far past due they are. Most banks can take on a reasonable level of nonperforming assets in the short run. However, if the number of nonperforming assets (NPAs) continues to rise over time, the lender’s financial health and future prosperity are jeopardized.
