NPA (Non-Performing Asset)

A Non-Performing Asset (NPA) is a loan or advance where the amount of principal or interest due has remained overdue for a specified period of time, usually 90 days or more. If the borrower is unable to pay scheduled amounts, the loan no longer generates income for the lender, and therefore, it is classified as an NPA. This is important because the classification shows possible default and financial stress of the borrower.

Key Features of NPAs

• Default Classification: A loan is considered an NPA when it is more than 90 days without interest and principal service from the borrower. In most cases, the bank can have such policies for its borrowers. This depends on the policies of the lender involved.
• Impact on Lenders: NPAs represent a significant risk for banks and financial institutions as they affect profitability and liquidity. When loans are classified as NPAs, lenders must set aside provisions to cover potential losses, impacting their overall financial health.
• Recovery Actions: Lenders may initiate various recovery measures for NPAs, such as repossessing collateral, restructuring the loan, or selling the debt to collection agencies. In severe cases, they may pursue legal action against the borrower.

Types of Non-Performing Assets

NPAs can be classified depending on the period for which they have been non-performing:

1. Substandard Assets: Those loans that have remained as NPAs for less than or equal to 12 months. These assets do not show much weakness, and there is still scope for recovery.
2. Doubtful Assets: Those loans that have remained as NPAs for more than 12 months. The chances of recovery of such loans are substantially low, and these indicate higher credit risk.
3. Loss Assets: Loans that are judged to be unrecoverable and are so identified either by the bank or outside auditors. Such assets are usually written off by the books of the banks as they have no chance of recovery.

Importance of Monitoring NPAs

• A Financial Health Indicator: The level of NPAs within a bank's portfolio will be a very good barometer for its financial soundness and the prudential practice of credit management. High levels of NPAs often indicate a bad lending practice or the quality of borrowers.
• Regulatory compliance: Banks are obligated to report NPAs regularly before the regulatory authorities. That helps to maintain transparency within the financial system and is stable.
• Impact on Lending Capacity: Tying up a large amount of funds in NPAs significantly reduces the ability of a bank to lend, thus affecting overall economic growth and access to credit for businesses and consumers.