A non-performing asset (NPA) is a classification used by financial institutions for loans and advances on which the principal is past due and on which no interest payments have been made for a period of time. They are recorded on a bank’s balance sheet after a prolonged period of non-payment by the borrower.
As per the current norm, if a loan is overdue during the last 90 days, it will be categorized as a Non-Performing Asset (NPA). A loan whose interest or installment of principal have remained ‘overdue due’ for a period of 90 days is thus considered as NPA. Overdue is a situation where the loan is not paid by the due date fixed by the bank.
CLASSIFICATION OF NON PERFORMING ASSETS
The NPA’s are classified into the following 4 categories by the banks :-
- STANDARD ASSETS – Standard Asset is one which does not disclose any problems, and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.
- SUB STANDARD ASSETS – Assets which has remained NPA for a period less than or equal to 12 months are called Sub Standard Assets. Bank has to maintain 15% of its reserves on such assets.
- DOUBTFUL ASSETS – An asset would be classified as doubtful if it has remained in the substandard category for a period of more than 12 months.
- LOSS ASSETS – A Loss asset is one where the loss has been identified by the bank, through the internal or external auditor or by the central bank inspectors. The amount has not been written off, wholly or partly.
TYPES OF NPA’s
Although the most common nonperforming assets are term loans, there are other forms of non performing assets as well.
- Overdraft and cash credit (OD/CC) accounts left out-of-order for more than 90 days
- Agricultural advances whose interest or principal installment payments remain overdue for two crop/harvest seasons for short duration crops or overdue one crop season for long duration crops
- Expected payment on any other type of account is overdue for more than 90 days
CAUSES OF NON PERFORMING ASSETS
- Industrial crisis – Industries depend entirely on the banks for meeting their finance requirements for projects. In case of an industrial crisis, it will change the banking sector & result in a rise in NPA.
- Lenient Lending Norms – Lenient lending norms by the lender such as over analysis of financial status and credit rating by banks for industry-barons are one of the reasons for rising NPA’s.
- Credit Distribution Risk Management – Misuse of funds by the borrowers also lead to NPA’s. Some borrowers bribe the bank officials and get the loan approved with a sole intention of default.
- Willful Default – When a lender willfully defaults in meeting his repayment obligations even when he is capable to fulfill them, it is known as willful default by lender.
Thus, in a nutshell, an asset becomes non-performing when it ceases to generate income for the bank & a high proportion of the assets that is not returning or Non-Performing is a matter of concern for any financial institution.