Understanding Non-Performing Assets (NPAs) | Hecta Proptech

Introduction:

Non-performing assets, also known as NPAs, are a significant issue for financial institutions worldwide. In simple terms, an NPA is a loan or credit that has not been repaid or serviced for a period of 90 days or more. When an asset turns non-performing, it affects the financial stability of the bank and can be detrimental to its growth. In this article, we will dive deeper into the concept of non-performing assets, their types, categories, and examples, as well as the distribution of NPAs recovered by banks.

What Is a Non performing Assets (NPAs)?

An NPA is an asset that has stopped generating income for the bank, primarily due to the borrower’s failure to repay the loan amount, which could be a principal amount, interest, or both. NPAs are created when borrowers default on their loan repayment obligations. These assets may be in the form of a loan, advance, overdraft, or any other credit facility that the bank has extended to the borrower.

How Non-performing Assets (NPAs) Work?

When a borrower fails to repay a loan or credit facility for a period of 90 days or more, the bank considers the asset as a non-performing asset. Once an asset is classified as an NPA, the bank has to stop accruing interest on the asset and start making provisions for the loss. The bank can classify an asset as an NPA even before the completion of 90 days if it believes that the borrower will not be able to repay the loan amount.

What are the Types of Non-performing Assets (NPAs)?

Performing Assets: These are assets that are generating income for the bank, and the borrower is making timely payments of the loan amount and interest.

Non-Performing Assets: These are assets that have stopped generating income for the bank due to the borrower’s failure to repay the loan amount, interest, or both.

What are the categories of NPA?

NPAs can be further classified into different categories based on the period for which the loan has remained unpaid. The Reserve Bank of India (RBI) has defined the categories of NPAs as follows:

Sub-Standard Assets: These are assets that have remained NPA for a period of 90 days or more, but not exceeding 12 months.

Doubtful Assets: These are assets that have remained in the sub-standard category for a period of 12 months or more.

Loss Assets: These are assets that are considered uncollectible and are of little or no value.

Examples of NPA:

There are several examples of NPAs that banks and financial institutions face. A few common examples include:

• A borrower taking a loan for a car and then failing to repay the loan amount for an extended period.
• A borrower taking a personal loan and then not repaying it on time.
• A borrower taking a business loan and then not repaying it due to business losses.

Distribution of NPAs recovered by banks:

Recovering Non-performing assets (NPAs) is a critical issue for banks and financial institutions. Recovering an NPA helps the bank improve its balance sheet and reduce the provisioning requirement for such assets. The distribution of NPAs recovered by banks is dependent on several factors, such as the type of loan, the period for which the loan has remained unpaid, the financial health of the borrower, and the legal and regulatory framework.

The recovery process for NPAs can be categorized into two types: voluntary and involuntary.

Voluntary recovery is when the borrower repays the loan amount and interest on their own, while involuntary recovery is when the bank uses legal action to recover the amount.

Involuntary recovery can be further classified into two types:

Recovery: This type of recovery involves legal action by the bank to recover the NPA amount. The bank may approach the court to obtain a decree against the borrower, which allows the bank to sell the borrower’s assets to recover the outstanding loan amount. In some cases, the court may appoint a receiver to manage the borrower’s assets until the loan amount is repaid.

Non-Judicial Recovery: This type of recovery involves the bank using its own methods to recover the NPA amount without approaching the court. The bank may use various methods such as recovery agents, debt restructuring, and debt settlement to recover the loan amount.

The recovery of NPAs is a complex process that involves a lot of legal and regulatory requirements. Banks and financial institutions need to be vigilant in their loan appraisal and monitoring processes to minimize the risk of NPAs. The RBI has put in place several measures to help banks recover their NPAs, such as the SARFAESI Act, which provides banks with powers to recover NPAs through non-judicial means.

Conclusion:

In conclusion, non-performing assets are a significant issue for banks and financial institutions. An NPA is an asset that has stopped generating income for the bank due to the borrower’s failure to repay the loan amount, interest, or both. NPAs can be classified into different categories based on the period for which the loan has remained unpaid. The recovery of NPAs is a critical issue for banks, and the distribution of NPAs recovered by banks is dependent on several factors such as the type of loan, the period for which the loan has remained unpaid, the financial health of the borrower, and the legal and regulatory framework. Banks and financial institutions need to have proper loan appraisal and monitoring processes in place to minimize the risk of NPAs and ensure financial stability.