Non-Performing Assets (NPA)

Banking firms classify advances to customers and loans as non-performing assets (NPAs) if the amount to be paid by the customer is overdue for payment. Even no payment of interest has also been made for it for a certain duration of time. 

Borrowings become non-performing assets (NPAs) once they are late in paying for 90 days or even more, although a few lenders have a smaller period in which they consider financing or advance overdue.

If we understand non-performing assets meaning, in simple terms it is called bad debt or loan. When a borrower fails to repay his/her interest or loan amount it becomes a no income-generating asset for the bank or the lending institution and the result is called as the loan amount is in arrears.

Classification of NPA

An NPA has few categories in which the borrowing is placed into an NPA. However, before borrowing an NPA the payee is given some grace period so they can repay the amount in the given time. The classification of NPAs is,

·        Standard and Substandard assets: The assets which are at less risk and are overdue for payment between 90 days and 12 months and the loan amount which are kept overdue for more than 12 months are known as Sub-Standard Assets. These have a much greater risk level, especially when paired with a customer with poor credit. Since lenders become less confident that the debtor will return the total balance, they frequently apply a cut to such non-performing loans.

·        Doubtful Debts: When the lenders feel very serious doubts that the person will not repay the debt or his/her amount is overdue for more than 18 months, it is classified as doubtful NPA. It highly affects the lender’s risk profile.

·        Loss Asset: An asset is categorized as a loss asset when the banks or lenders are forced to accept the fact that the particular investment or loan is a loss and they have to put it as a loss on their balance sheet. This is the final classification or level at which any loan amount can be categorized.

Working of NPA

As previously stated, debts are not placed inside the NPA classification until they have been unpaid for an extended length of time. Lenders take into account all of the variables that might cause a debtor to fall behind on payment of interest before extending a time window. Banks often deem a loan late which is overdue for a few months or more. The debt cannot become an NPA until the expiration of the grace or tolerance period.

Banks or lenders may try to recover the remaining loans by repossessing the estate or asset that was used as collateral for a loan. For illustration, if a person obtains a new mortgage and also the credit turns non-performing, the bank would often serve a letter of repossession on the property because it serves as security for the borrowed sum.

Importance of NPA

Non-performing assets categorization of a sum amount is important because a bank or a lender works for his/her profit when it needs to be paid by the borrower along with the sum amount given. Otherwise, the lender would be at a heavy loss. Which will affect the lender to lend any more money and his/her growth in the community. Interest received on lending is an important source of revenue for the lending institution. As a result, the NPA will have a detrimental impact on their capacity to produce sufficient revenue and, as a result, on the profitability or the financial results of the company or the firm. Lenders must maintain track of their NPAs, since having too many NPAs can hurt their profitability and ability to grow.

NPAs can be managed, based on the amount of money overdue for payment and the number of NPAs there are. Many companies are taking on a reasonable level of non performing assets in the shorter term. Nevertheless, if the number of non performing assets (NPAs) keeps rising over time, the economic position and future success of the lender are jeopardized.

Therefore, based on this security it is fully legalized to have a mortgage by any lender over any borrower as a security for the loan amount.

Conclusion

To sum up, an NPA (Non-performing asset) is the sum amount given to any person for his/her need as a loan has been overdue for some time and is in doubt by the lender to be paid in time. Thus, the sum amount is categorized as an NPA. An NPA is further classified as standard and substandard NPA, doubtful debts and loss of asset based on the time for which the amount is overdue for payment. Conversion of a loan amount to an NPA is important if the amount is not paid as, it is the main source of income for the lender, on non-payment of which his/her financial situations are at risk. However, NPAs can be managed differently by the lender’s capacity.