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NPA is used for those who cannot pay their debt or are the defaulters. They come into the defaulter category when they miss the main principal amount or the interest for more than three consecutive months; then, they are classified as Non-Performing Assets (NPA). So those who fall in the NPA category for the bank face various difficulties as a bank has to take action against them as they have gone against the bank policy and can be held responsible for that.
How does NPA Work?
The Non-performing assets are listed in the account sheet or any other sheet that the lender maintains, and that sheet is checked each month whether the borrower has paid their interest along with the principal amount or not. If someone gets into the defaulter category, the lender can force the borrower to pay the interest and principal amount. If they are still in the NPA category, the lender can sell the assets that the borrower has pledged when taking the loan. The borrower asset is not sold like this; first, the lender will write lousy debt and then sell the asset at a discount.
Generally, the debt is classified as a Non-performing asset after 90 days of default.
Types of Non-Performing Assets (NPA)
Overdraft and cash credit: When the account is left with no money in them to pay the interest and main amount, they fall in this NPA category:
These can be the agricultural advances that have not paid their interest and the principal amount for more than two crop harvest seasons. In short, their interest and principal are due for more than two months.
Recording Non-Performing Assets
This bank will classify the NPA into three categories: sub-standard assets, doubtful assets, and loss assets.
Sub-Standard Assets
This is a type of asset in which the borrower has to return the money within four months.
Doubtful Assets
The lender hopes that the borrower will repay the loan and be classified into the NPA category for more than 12months.
Loss Assets
In this, the lender is entirely sure that the borrower will not be able to pay the loan, and then they are classified into the NPA category. After this, they sell their asset, which is pledged when the loan is sold at discounts.
Special Considerations (Recovering losses)
This happened when the lender classified the borrower in the NPA category, and now they are going to sell their asset because they cannot pay the loan. And for selling, they look for some big companies who are masters in purchasing these types of investments. They sell the assets to these companies and try to recover the money they have given to the borrower. Even in some cases, even selling the lender asset is not enough. They may not be able to get the full money back that they have given to the NPA, so then they describe them as Bad debt and never provide them with a loan in the future.
Factors Contribute to NPA
When a bank lends the loan to the person whose capability of giving the loan is not confirmed, the bank takes a lot of risks in giving them the loans.
When they have to face the loss as the amount generated by selling off the NPA asset is not enough, they are still not able to generate that much money given to the borrower.
There are no appropriate means to collect the information between the commercial bank and the central NPA bank.
The bank should try to fund only those projects that look viable.
Impact of Non-Performing Assets on Operations
When the NPA is unable to return the money to the bank, even at sometimes selling the NPA assets, the bank has to face a massive loss as their property is not of that much value of the amount they have taken loan.
Because of the losses that occur due to NPA, these losses affect its own institution’s capital adequacy.
Preventive Measures to Prevent NPA
When a bank gives a loan to someone, they should consider their CIBIL score before passing any loan. By looking at the CIBIL score, they get an idea of how the person had dealt with their loans and whether they will be able to pay this loan or not.
Those who have taken big loans from the NPA bank have to be overseen, and the asset they pledge to serve is enough or not. The NPA bank should estimate their purchase in advance and then load accordingly.
They should circulate the NPA personal information very quickly so that every bank gets a warning about them, thus not letting them take any loan from any other bank.
Conclusion
So, in this article, we have learned about NPA’s, how NPA banks should give loans to the borrower, and what they have to keep in mind before providing the loan. What things should the borrower keep in mind before taking the loan? Even after taking the loan, they have to pay the interest and principal amount on time; otherwise, what consequences may they face? We also get an idea about different types of NPA loans and their subcategories.
