A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of finance principal has remained ‘past due’ for a specified period of time. NPA is used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.
With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)is a loan or an advance where;
- Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan,
- The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
- Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
- Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
- Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.
- No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days
Further classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:
- Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.
- Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.
- Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.
Effects of NPA:
- The day to day operations in the account becomes difficult as Bank starts adjusting money deposited against the dues.
- The approach of the Banker towards the borrower is more of lender – borrower rather than financer –cusomer relation. The borrower is in a helpless situation and at the mercy of the lender Bank, demoralising the borrower.