Banking Awareness Question Day 7: Non Performing Assets (Meaning)
A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets: As per RBI, “Loss asset 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.”
NPAs are bad for the banking industry due to the following reasons:
They do not generate income for the bank.
Provisions have to be made on these loans.
They reduce the profitability of the banks.
They adversely affect the prestige and image of the bank.
Banks may not give any fresh loans to the borrowers.
It affects the morale and confidence of the bank staff.
Creditors or suppliers may not give goods on credit but demand cash payment for the supplies made to the bank. Example, computers, chairs, tables, fans, etc.
Depositors may not deposit their money in banks which have a high percentage of NPAs.
Non-recovery of NPAs may erode the confidence of the depositors resulting in a run on the bank.
Share price of the bank may fall drastically.
Customers will think that the Management of the Bank is weak and therefore they are not able to recover the loan dues on due dates.
Reasons for NPA:
- Macro Economic situation in the country If the country is not growing then the GDP does not grow then the prices of the goods will be low, the industry will suffer therefore the borrowers may not repay the money.
- Increased interest rates in recent past: If the rates increased the customers might have borrowed now they are not able to pay the loan therefore the loans considered as NPA.
- Aggressive lending by Banks during the good time: Banks might have lent money without looking creditworthiness of the customers i.e. The bank does not consider the borrower able to repay the money or not.
- In some sectors like power infrastructure etc, are faring badly because of several other problems like environment forest clearances.
- willful defaulting: In this, the borrower able to repay the loan but the loan does not pay, here the borrower having capability to repay the loan but he is not interested then its termed as NPA.
If the borrower having a genuine reason (like floods or earthquakes)for not paying money then the loan is restricted under debt restructuring and giving multiple loans for the borrower and giving longer time to repay the money. If the loan is restructured the bank reduces interest rates, also grant loans with multiple accounts under CDR it’s up to 10cr or more.
Major steps are taken to solve the problems of Non-Performing Assets in India:-
1. Lok Adalat: limit up to 20 lakh Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines issued in 2001. They cover NPA up to Rs. 20 lakhs, both suits filed and non-suit filed are covered. Lok Adalats avoid the legal process. Non-Performing Asset
2. DRT (Debt Recovery Tribular): up to 10 lakh, Established in 1993 DRT is cover known as banks and financial institution with an outstanding 10 lakh rupees and more. Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established
3. SARFASI ACT: up to 1 lakh, Act 2002 The loan with outstanding up to 1 lakh allows bank & financial institution to action product Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as the Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose of the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. Non- Performing Asset
4. Compromise Settlement: Compromise Settlement Scheme provides a simple mechanism for the recovery of NPA. Compromise Settlement Scheme has applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded.
5. Credit Information Bureau: A good information system is required to prevent loans from turning into an NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank that can be assessed by all lending institutions.