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A non-performing asset (NPA) is a term used by a financial institution as a loan or advance that is not performing means the principal amount is past due and no interests have been paid by the client for a period of time or over 90 days. The lender considers a loan agreement to be broken as the loan is in default and the debtor does not meet the financial obligations.
This loan or advance results in an asset that no longer generates money for the lender as well as the financial institution or bank because the interest payments are not being made. Thus, these types of loans are considered ‘in default’ or ‘in arrears’.
Overdraft
An overdraft is a bank credit facility where the bank offers a loan on behalf of the customer, protecting the client from the bounded check. The bank allows the customer to withdraw money even with an insufficient fund or zero balance. It allows the customer to withdraw a higher amount of money than is available in the current account.
A fee is charged to the customer by the bank. As an overdraft is similar to a loan, interest is applied to the money withdrawn or paid. A predetermined limit for the interest payment varies from customer to customer based on the customer’s credit history, ratings and the relationship of the customer with the bank. If the client can’t repay the interest on the overdraft for more than 90 days, the credit becomes dormant then the loan is considered an NPA.
Types of Overdrafts
Secured overdraft- In this overdraft, you have to pledge any asset or collateral. If you are unable to pay the amount withdrawn, then the lender can sell off your assets to meet their obligations.
Unsecured overdraft- This overdraft is granted by the bank that does not require security or any property collateral up to the approved limits. The customer can utilize it whenever and however they please.
Feature of overdraft
Interest rate- Interest on an overdraft is based on the amount of money withdrawn. The interest adds to the principal amount and can be paid by month-end.
No prepayment charges- When you usually take a loan from a bank, a charge is applied called prepayment charges, but in overdraft, this is not required. You can pay the borrowed amount collectively.
Cash credit
Cash credit is a very common facility provided by most banks to customers. In cash credit, the client or company can withdraw money from the current bank account even if there is no credit balance. There is a term called borrowing limit given by the commercial bank where you can withdraw only a certain amount of money. The interest is applied by the bank on the daily closing balance. It is short-term finance provided by the bank. The cash credit is treated as NPA when there is no credit continuously above 90 days as per the balance sheet.
Features of Cash Credit
The borrowing limit of the cash credit facility is the limit of the maximum amount of funds or money that is used or withdrawn as per the bank’s rules.
The customer can deposit or withdraw money any number of times until the borrowing limit is not exhausted.
The bank examines the way of drawing by the customer and studies their debts, creditors, etc., to determine the borrowing limit of the customer.
Agriculture Advances
Agricultural advances are the advances or loans given by the bank for agricultural purposes. This came to effect on September 30, 2004. The agricultural advances become a non-performing asset based on the crop seasons.
Long duration crops- The crops that require a duration of one year or more than a year means until the crops are harvested are called long duration crops.
Short duration crops- The crops with a crop season of less than one year belong to short-duration crops.
So based on these crop seasons, the interest for short duration crops on the principal amount remains overdue, while for long duration crops, the loan granted will turn into non-performing assets. As per the norms of agricultural loans, the term loans or advances given to non-agriculturists, the NPAs are determined based on non-agricultural loans, which are 90 days delinquency norms.
Conclusion
Non-performing assets are said to be recorded in the bank’s balance sheet when the client does not repay the amount for a long period and is a financial burden for the lender. This type of remark affects the bank’s finances, and the bank will be in jeopardy. Lenders have the choice to repay or recover their losses by pledging an asset or collateral property. The bank or financial institution can also write off the loan as a bad debt and then sell the assets that were pledged.
NPAs do not earn anything for the bank, and thus RBI has said that non-performing assets stop generating income for the banks. NPAs are manageable, but it depends on the past due, and many NPAs can affect the financial fitness of the bank.
