NPA Account Settlement: Key Steps to Resolving Non-Performing Assets
The problem of NPA or Non-Performing Assets has impacted the health of banks and financial institutions in India two decades before. If we see hard facts, then in the financial year of 2017, the value of NPA in private sector banks was approximately 900 billion rupees or more. But by following stringent regulations, the government has brought it down significantly.
ccording to financial analysts, the gross NPA ratio is a measure of the overall quality of a financial institution’s loan book.
What is Non-Performing Assets? In broad terms, it can be defined as a classification for loans or advances that are in default, or they are in arrears. It means the interest payment or principal is either missed or delayed. This loan account is called a NPA. It is a general definition of a non-performing asset.
In India, an asset is classified as an NPA if the borrower has the principal or interest on the loan or advance given by the lender is overdue for a period of 90 days.
There are three categories of NPA:
Sub-Standard Assets
When an asset remains NPA for 12 months, it is called a sub-standard asset. Such assets have well-defined credit weaknesses.
Doubtful Assets
When an asset remains NPA for more than 12 months, it is called a sub-standard asset. Such assets have well-defined credit weaknesses. In addition to that, it makes liquidation or collection in full of the borrower.
Loss Assets
When the loss of an asset is identified by the bank, internal or external auditors, or by RBI inspection but the amount has not been written off completely. Such assets are considered uncollectible.
Steps of NPA Account Settlement
The NPA account settlement process is the process of carrying out the mechanisms to restore the financial asset. The recovery of Non-Performing Assets is important because it helps the bank to sustain. Some key steps are:
Lok Adalats
The Lok Adalat is one of the alternative mechanisms of dispute redressal. It is set up by the government. In this forum disputes or cases are pending in the court of law or at the pre-litigation stage. They are settled mutually.
If the parties are not satisfied with the award of the Lok Adalat, they can initiate litigation by approaching the appropriate court by filing a case.
The jurisdiction of the Lok Adalats is in cases/disputes of less than 10 lakh rupees in value.
Debt Recovery Tribunals (DRTs)
The Recovery of Debts Due to Banks and Financial Institutions Act,1993 (RDDBFI Act) made provisions for faster resolution and redressal to lenders and borrowers through filing of Original Applications (OA) in the Debt Recovery Tribunals (DRTs) and appeals in Debts Recovery Appellate Tribunals (DRATs). Today, the government has established 39 DRTs and 5 DRATs.
Sarfaesi Act
This was formed after the considerations carried out by various committees constituted by the government to examine the changes and reforms required in the legal and banking systems. The purpose is for better functioning of the debt recovery mechanisms.
This Act aims to achieve recovery of Non-Performing Assets through three major ways which are the following:
- Securitization
- Asset Reconstruction
- Enforcement of Security Interests
Insolvency And Bankruptcy Code (IBC)
It came into existence in the year 2016. Before that, there were various laws and institutions that overlapped in jurisdiction and functioning. It created a lot of confusion in dealing with NPA.
There was no legal framework available so that an efficient procedure could be used for the debt recovery process. Therefore, IBC came into existence.
All these steps are the key steps of NPA Account Settlement.