Non Performing Assets (NPA)
The assets of the banks which don’t perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.
According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
- For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
- For Long Duration Crops, the above would be 1 Crop season from the due date.
Provisioning Coverage Ratio
For every loan given out, the banks to keep aside some extra funds to cover up losses if something goes wrong with those loans. This is called provisioning. Provisioning Coverage Ratio (PCR) refers to the funds to be set aside by the banks as fraction to the loans.
Standard Asset
If the borrower regularly pays his dues regularly and on time; bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.
However, if things go wrong and loans turn into bad loans, the PCR would increase depending up the classification of the NPA as discussed in next section.
Classification of the NPAs
Banks are required to classify nonperforming assets further into three main categories (Sub-standard, doubtful and loss) based on the period for which the asset has remained non performing. This is as per transition of a loan from standard loan to loss asset as follows:
- If the borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as follows:
- 15% of outstanding amount in case of Secured loans
- 25% of outstanding amount in case of Unsecured loans
- If sub-standard asset remains so for a period of 12 more months; it would be termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows:
- Up to one year: 25% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
- 1-3 years: 40% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
- more than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
- If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal / external audit and it would be called loss asset. An NPA can declared loss only if it has been identified to be so by internal or external auditors.
Example of NPA
We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So
- It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date)
- It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days)
- It will be Sub-standard from August 30, 2010 till August 29, 2011
- It will be doubtful from August 30, 2011 till August 29, 2012
It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years.
Implications of the NPAs on Banks
The most important implication of the NPA is that a bank can neither credit the income nor debit to loss, unless either recovered or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.
Gross NPA and Net NPA
The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the amount which is outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross NPA less interest debited to borrowal account and not recovered or recognized as income. RBI has prescribed a formula for deciding the Gross NPA and Net NPA.
NPA and SARFAESI Act
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.
Reselling of NPAs
If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL). These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount.
Hemant thakur
August 3, 2013 at 7:44 pmVery valuable information. Thanks a lots
shanthi
November 21, 2013 at 9:14 amstill i dont understand rhe exact meaning of NPA. please explain with any other example
Anand Kumar
November 8, 2017 at 11:48 pmIt means Non performing Asset. which is opposite of performing asset for Bank. Asset is Loan given to customer which earn income for Bank as interest.
anjeel
December 11, 2018 at 2:23 pmit’s nothing but declaring a loanee unfit ….hahahahaha….that he is not repaying……so take all his collateral to refund
Samir Roy
July 20, 2015 at 3:26 pmIf any body deposit the interest & term loan after 2/ 3 day after NPA then what happen
Ronak Jain
July 21, 2015 at 5:30 pmReally, very valueable information in very easy language
Shailly Gupta
July 29, 2015 at 11:52 amThanku for such information in simple way and very easy to understand with the help of examples.
tayappa koli
August 1, 2015 at 2:51 pmThanks to General knowledge today for sharing such valuable information
sunil patnaik
August 10, 2015 at 7:16 pmA Notice has been sent to one guaranter after 13 years of a NPA account, where the applicant is absconded since long. What should the guaranteer do?
Somnath Mandal
August 11, 2015 at 7:50 pmA1 info. A lot of thanks.
Priyanka
August 20, 2015 at 11:02 pmI have read many websites and books for banking terms and explanations. But I was very clear about the concept after reading your website… Very useful and nice explanation has been provided using simple words…. great job thank you for the info..
BAHAR-A-ALAM
August 21, 2015 at 6:07 amVery good succesion
R.C. Sharma
August 29, 2015 at 9:54 pmexplained in a very simple manner that even a lay man can understand the cocept in one go.
Roshan Das
September 10, 2015 at 12:10 pmThank you very much for sharing of Knowledge.
indianguy
November 2, 2015 at 6:25 pmIf a bank has written off an amount and give customer an account statement showing closing balance as zero, can bank still try to recover the written off amount?
Carren Benfirm
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Pratima srivastava
November 11, 2017 at 10:32 amThanks a lot for giving this information
I was confused
concept is clear now
Putta raje urs N
December 2, 2017 at 5:54 amEx army personal loan non credited sine long time nearabout twenty thousand Rs and later bank provide credit one time settlement the amount with interest. Same was deposited.The acct remain NPA.
Putta raje urs N
December 2, 2017 at 11:47 amI would like to known who are eligible and anycealing limit for NPA. Is also apply for farmers lian and ex army persons of personal loan. If loan cleared of submission of solution then NPA is applicable.
Putta raje urs N
December 2, 2017 at 11:52 amThanks for info. I may closed such acct permanently
syed ismail
January 25, 2018 at 1:27 pmAs per your article you mentioned NAP Sales to ARC company [india]. I have clarification you mentioned the account keeps at-least 15 months. What happened after 15 months. They can(ARC Company) return to bank or they have maintained(ARC Company).
waqaransari
February 1, 2018 at 5:59 pmI am so happy l have known after studying thanks a lot given us eassy information
Ankush
April 2, 2018 at 11:59 amVery valuable information. The article has cleared some doubts which were not clear previously
surender bhardwaj
April 12, 2018 at 2:10 pmgreat explanation but u did’t cover NPA in agriculture
Purna Indu Mukhopadhyay
April 12, 2018 at 8:18 pmI had a loan became as NPA, though bank settled with a lower amount. which I had paid and bank gave certificate on that. Is there any bad impact can show on my CIBIL or any future loan or Credit Card application?
[email protected]
April 18, 2018 at 6:30 pmThe revised norms issued during February 2018 to be implemented in true spirit.
SHATRUGHAN RAMNIHOR JAISWAR
June 5, 2018 at 1:20 pmVery Nice notes sir .thank you verymuch Sir
angad mishra
June 5, 2018 at 5:32 pmis interest is applicable on rest amount of NPA account , my account hss converted in NPA in oct 2017
Raghavendra
June 15, 2018 at 12:27 pmGreat……HOnestly good job…can you please relate it with the FRDI bill, the same content.??
Jaikish Jain
August 7, 2018 at 2:24 pmGood information….. I have a query if anybody can resolve please? I have mortgage loan and that is got NPA on 31St of July. Problem is the company i was working as a ASM becomes bankrupt and not giving the salary of all the employee including me and this is the only source of income for me to run the family. In this case is there any way or LAW which can help me to get out of this. and protect myself from NPA and SARFESIA process. Please let me know.
James E Packer.Jr.
December 23, 2019 at 8:08 amSounds to me as a very fair note.The time thats involved to give the delinquency of the note is more than fair and decent to the borrower. Fear,on the part of the customer, plays a huge part of the picture. The more fear the less the borrower feels he less interested in taking care of the asset . This been my experiences of knowledge of lending. The customer will destroy or render the asset completely worthless, “0” value. So the way this note works, the customer is treated fairly and without a great deal of fear.
James E Packer Jr.