Non Performing Asset (NPA)

Introduction

• An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
• Loan or advances for which the interest and/ or installment of principal has remained ‘past due’ or remained unpaid for a period of 90 days.
• It is represented in percentage out of the total advances in the bank’s balance sheet.
• It is also referred to as ‘Bad Assets’. 

Assets and Liabilities in Banking 

Assets

• Tangible objects or intangible rights of an enterprise which carry probable future benefits.
• Assets are classified as current assets and noncurrent assets.
• Current assets:  Held in the form of cash in hand, cash at bank, Bills receivables, etc.
• Non current assets:  Assets which are not held for resale but for producing goods & Services.

Liabilities

• Refers to the financial obligation of an enterprise other than the owner’s fund.
• On the basis of period, it can be classified as current and non current liabilities.
• Current liabilities are those liabilities, settled within 12 months from the date of balance sheet and Non current liabilities are those liabilities, settled after 12 months from the date of balance sheet. 

RBI’s Definition of NPA

• Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
• Account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft or Cash Credit.
• The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
• Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two and a half years in the case of an advance granted for agricultural purposes.
• Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Classification of NPA

• Substandard Assets: Assets which have remained NPA for a period less than or equal to 18 months.
• Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of more than 18 months.
• Loss Assets: They are uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.
• Stressed Assets:  They are the sum of NPAs, Restructured Loans and Written-off Assets

Reasons for NPA

• Reasons are manifold. However few major reasons are:

1. Willful defaulters, fraud, mismanagement and misappropriation of funds;
2. Lack of proper pre-appraisal and follow up;
3. Reckless lending;
4. Delay in completing the project (majorly in the infrastructure segment);
5. Business failures, etc.

Steps Taken to Tackle NPA 

• Insolvency and Bankruptcy Code (IBC): A time-bound process for resolving insolvency in companies and among individuals.

• Credit Risk Management: Involves credit appraisal and monitoring accountability and credit by performing various analyses on profit and loss accounts.

• Sustainable Structuring of Stressed Assets: Loans are restructured by separating a sustainable loan from an unsustainable loan. 

• Prompted Corrective Action (PCA):  Allow the regulator to place certain restrictions such as halting branch expansion, stopping dividend payment, cap on lending, etc.
• Other Schemes such as Project Sashakt, Indradhanush and introduction of Fintech in banking system, etc.