What is Non-Performing Asset or NPA?
NPA or Non-Performing Assets as the name suggest assets which are not performing. Loans given by the banks are assets for banks. If the borrower who has taken a loan from a bank does not repay the principal amount and interest within the agreed time, then such loan account becomes Non-performing asset for the bank.
Mere delay in making principal and interest payments to bank does not make an account Non-performing Asset. There is time limit of 90 days is defined under the regulations issued by Reserve Bank of India in this regard. If the repayment of principal amount and interest payment are not done within such time lines, the bank classifies such account as an NPA.
How Non-Performing Asset or NPA is classified?
As per RBI regulations, an asset/loan account shall be termed as NPA if the loan payments have not been made within a period of 90 days from the due date or as per the terms and conditions of each loan.
NPAs are classified under sub-parts, elaborated as under:
- Standard Assets :
Standard Asset are those which does not disclose any problems and which does not carry more than normal risk attached to the business. This shall be the initial step for being an NPA.
- Sub-Standard Assets :
A substandard asset is the one, which can be classified as NPA for a period less than or equal to 12 months. Such an asset has well-defined credit weaknesses that jeopardize the repayment of debt and are characterized by the possibility that the bank would sustain some loss, if deficiencies not corrected.
- Doubtful Assets :
An asset would be classified as doubtful if it has remained in the substandard category for a period of more than 12 months.
- Loss Assets :
An asset that is an NPA for a period of more than 36 months is treated as a lost asset. Loss Assets are identified by the Bank or the External/Internal Auditors or RBI Inspectors. Such an asset is considered as uncollectable or if collected shall have a negligible value of recovery.
How do NPAs impact the economy?
NPAs cause a major impact on the economy and business environment, some of the impacts are stated below:
- Lenders suffer lowering of profit margins.
- Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
- Higher interest rates by the banks to maintain the profit margin.
- Redirecting funds from the good projects to the bad ones.
- As investments got stuck, it may result in it may result in unemployment.
- Loss of funds impacts the financial strength of the bank
What are the various steps taken by Government to control NPAs?
Varied Steps are taken by RBI and Government to recuperate the concern of NPA in last few years, such as
- Government has launched ‘Mission Indradhanush’ to make the working of public sector bank more transparent and professional in order to curb the menace of NPA in future.
- Government has also introduced Insolvency and Bankruptcy Code 2016.
Various Rules, Regulations and Acts has also been passed to curb NPAs,
- The Debt Recovery Tribunals (DRTs)–1993
To decrease the time required for settling cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.
- Credit Information Bureau – 2000
It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.
- Lok Adalats – 2001
They are helpful in tackling and recovery of small loans however they are limited up to 5 lakh rupees loans only by the RBI guidelines issued in 2001.
- Compromise Settlement – 2001
It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and fraud cases are excluded.
- Sarfaesi Act – 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above.
The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:
- Take ownership of security and/or
- Control over the management of the borrowing concern.
- Appoint a person to manage the concern.
- Further, this act has been amended last year to make its enforcement faster, such as Bank takes help of police and mayors in taking over properties.
- ARC (Asset Reconstruction Companies)
The RBI gave license to 14 new ARCs recently after the amendment of the SARFAESI Act of 2002. These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.
- Corporate debt restructuring – 2005
It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.
- 5:25 rule – 2014
Also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries. It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long term projects.
- Joint Lenders Forum – 2014
It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loan to same individual or company from different banks. It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.
- Bad Banks – 2017
Economic survey 16-17, also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects.
Government and RBI can speed up the recovery of NPA in following ways:
- Amendment in banking law to give RBI more powers
- Stringent NPA recovery rules
- RBI’s loan restructuring schemes
- Present NPA scenario
- Banks need to write off NPAs
How NPAs can be avoided?
Increase in NPA can also be avoided by taking following measures:
- Credit Impact:
The scope for extending credit to the retail sector is limited. The eagerness of governments and political parties to write off agricultural loans doesn’t enthuse banks to expand lending to farmers. The other option for banks is to invest in securities beyond SLR. With the Government having decided to moderate their borrowings to restraint the fiscal deficit and the RBI lowering the repo rate, the scramble to invest in securities will take the already low yields downwards.
- Management of Loans
Bank should have a complete check on the assets of the individual prior giving loans and at the end of the financial year of the banks, external auditor has to go through every asset being mortgage by the banks to know there current credit limits. Thus, management of loans according to the credit worthiness of an individual is highly important.
- Better Appraisal of Projects
Bank should properly check the creditworthiness of the project plan and the surety before providing with any such loans and advances.
- Good Internal Audit of banks
Bank Auditors should conduct regular internal audits to check the performance of the assets and take urgent measures in order to control and avoid assets from turning Non-Performing
- Responsibility of Auditors
It is one of the major responsibilities of the Statutory and Internal Auditors to crosscheck all the matters of assets and liabilities of the banking system for its proper functioning, and prepare a detailed financial statements for the knowledge of the bank members and stake holders.
