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NPA classification RBI 2021: The full form of NPA is non-performing assets. NPAs are loans from Indian banks and other financial institutions that have been overdue for a long time(90 days or more), both in terms of interest and principal. Like any other business, banks should be profitable, but NPAs consume a large portion of banks’ margins. Recently, RBI guidelines on NPA were released, which we will learn here.
Different types of NPA
The different types of NPA as per RBI NPA circular 2022 are:
Substandard NPA: The specific NPA that is overdue for fewer than 12 months or equal.
Suspicious NPA: That NPAT is in the category of substandard NPA for 12 months or less.
Loss of Assets: Loss of assets occurs if NPAs are recognised as losses incurred by banks or financial institutions, according to the Reserve Bank of India (RBI) inspections.
Rules of provision
The rules of provision are being set by the Reserve Bank of India and are the same for all banks dealing with NPAs. These are as follows:
Ten per cent of the allowance is applicable for the total amount without any budget for securities or any other coverage of government guarantee.
An NPA that falls into the lower category would add another 10 per cent coverage to 20 per cent of the total outstanding amount.
The provisional requirement for suspicious or unsecured NPAs has been declared 100 per cent.
Factors Contributing to Non-Performing Assets (NPAs)
The reasons for contributing to non-performing assets (NPAs ) are as follows:
Bank lending to those whose creditworthiness is not guaranteed and carries much higher risk.
Banks cannot reduce their losses by fully understanding the adequacy of the bank in terms of a loan or capital loss over a while.
Funds are being redirected elsewhere by the company’s promoters.
Banks try to finance projects that are not effective.
There is not enough way for commercial banks to collect and distribute credit information.
Unskilled recovery of loans from unexpected borrowers.
Effects of NPA on activities
NPAs have a detrimental effect on the banking system
This reduces the profit of the banks.
This reduces the capital adequacy of a bank or financial institution.
Banks are reluctant to lend and take risks at zero percent. Thus, the creation of new debts is hampered.
Banks are starting to focus on debt risk management instead of being profitable.
Funding costs are due to NPAs.
Preventive measures are taken to prevent NPA
The preventive measures taken by the banks to prevent further loans from falling into the NPA category are-
CIBIL score of an individual/corporation before making a loan or payment.
A compromise or use of different settlement schemes.
Use of procedures for alternative dispute resolution procedures for speedy settlement, such as debt recovery tribunals and the use of people’s courts.
The defaulters’ information should be actively disseminated so that they cannot choose any other loan/financing from anywhere else.
Asset Restructuring uses the company’s services.
Taking strict action against big NPAs.
Legal reforms such as bankruptcy and the implementation of the bankruptcy code are being used more and more.
Proposing guidelines on diversion/default of funds.
RBI guidelines on NPA (NPA classification RBI 2021)
RBI guidelines on NPA include some initial measures taken by the Reserve Bank of India to prevent NPAs. These RBI guidelines on NPA are as follows:
The community of lenders must adhere to strict deadlines for a resolution plan.
Lenders must provide some incentives to agree on ongoing resolution plans.
Initiatives should be taken to improve the existing restructuring system, restructuring large values, etc.
For non-cooperative borrowers with lenders, future loans must be more expensive in resolution.
The sale of assets must necessarily be given more regulatory treatment that is liberal.
If a loss is disclosed, lenders must be allowed to spread sales losses for at least two years.
Purchasing facilities should be allowed by specialised agencies for the acquisition of ‘Stressed Company’.
Necessary steps should be taken to facilitate the better functioning of asset restructuring companies.
Private equity / sector-specific companies should be helped to play a very active role in the underlying asset market.
Settlement plan
Banks are autonomous in formulating and implementing their policies for debt recovery, including repayment of loans and negotiation of agreements.
Folk courts are formed to deal with small NPAs that range up to Rs. 20 lakhs. Folk courts are usually not very strict with defaulters and are a cheap and easy way to settle debt disputes.
NCLT and the National Company Law Appellate Tribunal (NCALT) – an organisation that replaces the Board of Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR), which is under IBC.
Selling NPAs to all other banks – There is a provision for a bank to sell its NPAs only to another bank if it has been in the books of the seller bank for more than two years.
Conclusion
NPAs or non-performing assets are not desirable phenomena in the Indian banking system. It is like cancer that is destroying the entire banking system of India. In the case of a term loan, the principal installment/interest is outstanding for 90 days. There are some new guidelines that RBI has revealed for NPA. These RBI guidelines on NPA, will help people in many ways.
