An NPA (Non-Performing Asset) is a loan with overdue payments, impacting income or asset utilization. This article extensively covers its definition, calculation, types, impacts, and crucial mitigation strategies, imperative in the banking and finance sectors for financial stability and growth.
What is NPA
A non-performing asset(NPA) is a loan or advance that has gone into dereliction. This happens when the borrower fails to make payments or meet other terms of the loan agreement for an extended period, generally 90 days. When loans are performing, it indicates the borrower is facing fiscal difficulty and is unfit to meet their scores. For banks and other lending institutions, a buildup of NPAs on their balance wastes creates multitudinous problems. These non-earning means indurate up capital that could be advanced out to other further creditworthy borrowers. They also reduce interest income and profitability. However, it strains the bank’s liquidity and fiscal stability, If too numerous loans turn bad.
Lenders have to put in place checks and balances to help too numerous NPAs accumulate. And when loans do go bad, resolution mechanisms have to be stationed- like debt restructuring, asset seizure, legal proceedings or negotiations. Bringing NPAs back to performing status or recovering quantities owed is crucial to perfecting the bank’s fiscal performance.
In summary, NPAs reflect stress in the underpinning borrower accounts and pose pitfalls for advancing institutions. Managing them prudently by precluding avoidable defaults and resolving stressed-out loans fleetly is vital for the smooth functioning of the banking system.
Calculation of NPA
NPA is calculated based on the income recognition, asset classification, and provisioning norms specified by the Reserve Bank of India. The gross NPA (GNPA) is calculated as (Total NPAs/ Total Loans & Advances) x 100. Here, Total NPAs = Sum of all loan accounts classified as NPAs.
Types of NPA
1. Substandard Assets
Substandard assets are loans or advances that have remained categorized as NPAs for up to 12 months. These assets pose a higher risk compared to performing assets but still have the potential for recovery with timely intervention and corrective measures.
2. Doubtful Assets
Doubtful assets are loans or advances that have remained categorized as NPAs for over 12 to 36 months. These assets represent a greater level of uncertainty regarding recovery and may require more extensive efforts for resolution.
3. Loss Assets
Loss assets are loans or advances that have remained categorized as NPAs for over 36 months. These assets are considered irrecoverable or unlikely to be recovered, leading to significant losses for the lending institution.
Different Types of Non-Performing Assets in Various Sectors
Non-performing assets (NPAs) have become a severe issue plaguing the Indian banking sector. High levels of bad loans on banks’ balance sheets constrict their lending capabilities and prosperity. Typically, different sectors have different underlying reasons for burgeoning NPAs.
- Infrastructure and Power Sectors: The infrastructure sector has witnessed massive cost and time overruns leading to stalled projects. Cancelled coal block allocations and irregular coal supply have severely hit power companies. This has led to their inability to pay interest and repay loans.
- Textile Sector: Old machinery, outdated technology and strong competition from countries like Bangladesh and Vietnam have led to huge losses for textile companies. This has severely impacted their loan repayment capabilities resulting in NPAs.
- MSME Sector: Delayed payments from large companies, restrictive regulatory policies, lack of finance, and resource & capacity constraints are key challenges for MSMEs. Due to thin profit margins, MSMEs frequently default on borrowing repayments.
- Other Key Sectors: Real estate, aviation companies, the steel sector and exporters have all faced turbulent phases causing their borrowing accounts to turn delinquent leading to a further rise in overall NPAs.
Characteristics & Features of NPA
Non-performing assets (NPAs) reflect loans and advances where the borrower has stopped paying interest and principal repayments to the lender. NPAs have some typical attributes that differentiate them from standard accounts.
- Default on Interest and Principal Repayment: The most fundamental criterion of an NPA is that the borrower fails to pay interest or principal amount for 90 days or more. This inability to make payments reflects issues in the borrower’s cash flows.
- Provisioning Norms: Banks need to start provisioning for accounts that are about to become NPAs. This means keeping aside money to cover expected losses from such bad loans based on RBI regulations. Higher-risk category loans require greater provisioning.
- Negative Impact on Profitability: A rise in NPAs, requiring higher provisioning, leads to lower book profits for banks. NPAs also constrain a bank’s capital which can negatively impact its lending capabilities and growth.
- Asset Classification: The RBI mandates asset classification norms like sub-standard, doubtful, and loss assets depending on the period for which the account remains overdue. NPAs have to be appropriately classified by banks.
- Resolution Mechanisms: Various mechanisms like the SARFAESI Act, Debt Recovery Tribunals, and IBC proceedings exist for banks to resolve stressed accounts and recover funds locked up in NPAs.
What is Assets?
An asset refers to any property owned by an individual or company that has commercial value. The key difference between performing assets and NPA is given below:
Difference Between Assets & NPA
| Parameter | Performing Asset | Non-Performing Asset |
| Payment status | Regular payment of interest and principal | Interest and principal payments remain unpaid |
| Classification | Standard asset | Substandard/Doubtful/Loss asset |
| Risk level | Low risk of loss to bank | High risk of loss to bank |
What are the Potential Impacts of NPA?
- On Indian Economy – Higher NPAs adversely affect the financial health of banks. It reduces their ability to extend new loans and impacts the flow of credit in the economy.
- On Creditors – Higher NPAs result in losses and reduce the profitability of banks. It also diminishes the capacity of banks to raise resources from the market.
- On Debtors – High NPAs make credit more expensive for efficient borrowers as banks hike interest rates to offset losses from NPAs. It becomes difficult for viable projects to get funding.
What is the Limit or Percentage a Bank Can Hold for NPA?
As per RBI norms, the total gross NPAs of all commercial banks in India should not exceed 6% of total advances. If banks cross this threshold, it raises concerns about their financial health and asset quality. RBI monitors individual banks and sectoral NPAs regularly.
How the Recovery of NPA is Done?
Banks initiate the recovery of NPAs via legal means such as filing cases in Debt Recovery Tribunals (DRTs) and Lok Adalats. Other methods include compromise/settlement with borrowers, sale of secured assets, upgrading of NPA accounts, and technical/prudential write-offs.
What is NPA Provisioning?
As per RBI norms, banks are required to set aside money from current profits in the form of provisions to cover potential losses from NPAs. Higher provisioning impacts bank profitability. Provisioning levels are specified based on asset classification as standard, substandard, etc.
What are GNPA and NNPA?
GNPA refers to the total amount of NPAs held by banks and is calculated by simply adding all loan accounts that have been classified as NPAs. NNPA is calculated by deducting provisions and write-offs from GNPA.
| Parameter | GNPA | NNPA |
| Meaning | Total amount of NPAs | Actual losses after adjusting provisions |
| Calculation | Gross NPA – Total loans classified as NPA | GNPA – Provisions – Write-Offs |
Tricks to Mitigate the Impact of NPA
1. Strategies Used by Banks to Reduce NPA
This includes early detection of NPAs via periodic reviews, improved credit monitoring, adopting strategic debt restructuring, developing recovery policies, and upgradation of accounts.
2. Strategies Used by Regulatory Authorities
The RBI has taken steps like setting up NPA Resolution Advisory Committees, Project Sashakt campaign for large NPAs, a 5/25 refinance window for standard loans, and stringent provisioning norms to disincentivize high leverage.
Preventive Measures to Avoid Non-Performing Assets (NPA)
Before exploring preventive measures, it’s crucial to understand the significance of proactive risk management in mitigating NPAs.
1. Significance of Credit Risk Assessment and Due Diligence
Banks need to completely estimate credit proffers grounded on detailed fiscal statements and cash overflows of the borrowers. Comprehensive appraisal norms should be adopted to assess factors like operation proficiency, request position, assiduity outlook, etc. before sanctioning loans. Strict due industriousness helps banks understand pitfalls more.
2. Effective Loan Monitoring and Recovery Mechanisms
Close monitoring of loans through periodic review of accounts, relating early signs of default, engaging with borrowers, and timely restructuring of loans play a pivotal part. Robust recovery mechanisms like Lok Adalats, Debt Recovery Bars, and timely resolution under IBC also help. visionary loan monitoring and recovery sweats can lower NPAs.
3. Strengthening Risk Management Practices in the Banking Sector
Banks should apply enterprise-wide threat operation fabrics aligned with their portfolios. This includes prudent morals for provisioning and write-offs, threat-grounded pricing of loans, and diversification of credit across sectors. Investment in technology for early warning systems and analytics is also essential. espousing stylish threat operation practices ensures long-term asset quality.
Advantages & Disadvantage of Non-performing Asset
1. Advantages of Non-performing Asset
- Helps identify weak/ parlous accounts
- Provides a chance for recovery/ restructuring of loans
2. Disadvantages of Non-performing Asset
- Results in losses and reduces bank profitability
- Increases credit costs for other borrowers
Final Word
In conclusion, high NPAs pose significant pitfalls to the stability of the banking system. A robust frame for the timely discovery and resolution of stressed-out means is pivotal. Banks need to strengthen underwriting norms while controllers should encourage reforms to produce incitement structures to disincentivize recklessness and assure sustainability.
FAQs
The GNPA ratio of Indian banks is around 7% as of March 2022.
The infrastructure sector has the highest NPAs among Indian industries.
RBI has introduced reforms like the IBC, tighter oversight of large exposures, and pushed banks for timely resolution.
A loan becomes NPA if interest/instalment overdue exceeds 90 days.
GNPA includes both performing and non-performing loans on which borrowers have defaulted, NNPA includes only non-performing out of these.
Disclaimer
This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.
