To understand more about non-performing assets, let us consider an example. You have approached a bank to give your company a loan amount of INR 24 lakh with an interest-only payment of INR 23,000 (10% interest). If you fail to pay this amount for 90 days or 3 consecutive months, this loan would be categorized as a non-performing asset by the bank.
How Are NPAs Classified?
When interest is not paid for about 90 days, loans are considered an NPA. Banks are required to classify these NPAs further based on the time period of the amount being not paid. They are Substandard, Doubtful, and Loss Assets. Let us see why.
Substandard Assets: If the NPA remains the same for a time period that is less than or equal to 12 months (1 year), these assets would be grouped in a category called substandard assets.
Doubtful assets: If an asset remains in the above substandard category for a time period of 12 months i.e. interest not paid for a time period of 24 months from the time of approval, then this would fall under the doubtful assets category.
Loss Assets: According to the RBI, a loan is considered to be a loss asset if it ‘is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.’ Since these loans have not been performed for about three years, they turn into losses for the banks. It is considered to be uncollectible because it is not possible to recover these assets back.
Key Points About NPAs
- These unpaid loans are reflected on the balance sheets of banks.
- As a result of these NPAs, the assets that were pledged to the lender can be liquidated. Otherwise, the lender considers the loan amount as a bad debt. In the case of this scenario, the lender tries to get dues through a tribunal.
- In 2013, India’s gross NPA was about Rs. 2,52,275 crore and this has further increased tremendously. In the year 2018, the gross NPA was 10,03,404 crores. However, it is now showing a downward trend.
Impact Of NPAs
- A higher number of NPAs becomes unfavourable for a bank. This is because banks having too many loans that are classified as non-functional assets won’t be rendering any income in the form of interest to the bank.
- It creates a bad image for banks in the domestic and global markets.
- Too many NPAs also decrease funding to other potentially efficient borrowers.
- The risk-bearing capacity of banks with higher NPAs gets affected.
- The bank’s profitability also decreases, limiting the further creation of any assets. This halts their growth, expansion, and other plans.
We have articles for several other terms that you can check out to either use for educational purposes or anything else.
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