Non-performing Asset or NPA has been a widely discussed topic in the past few decades in India. It has become a widespread issue in the economy.
Since the magnitude of NPA in India is quite high, the government has to take stringent steps to keep it under control. What is NPA?
Well, as far as the financial definition is concerned, an NPA is an asset or account of the borrower that has been classified as a doubtful or sub-standard or lost asset by a financial institution.
In other words, it is an advance or loan for which the bank has not received the principal amount for 90 days or more.
The unpaid amount is classified as a non-performing asset. It is because it does not generate any income for the bank because the borrower is not paying interest.
As per the definition given by the RBI, as an sasset (that includes leased asset) when it stops generating income is called NPA. It is an advance issued or loan given for which
- Any installment or interest for which the amount is overdue more than 90 days.
- The installment is due for two crop seasons of short-duration crops and one crop season of long-duration crops.
- For security transactions, the liquidity amount is overdue for more than 90 days.
- For derivative transactions, the due receivables are unpaid for more than 90 days.
NPA management is the way of handling the NPA in such a manner that it puts the least impact on the institution.
Impact of Non-Performing Assets
The measurement of the efficiency of a bank is not just its balance sheet. There is another important aspect and that is how well the bank manages the return of its assets.
When a bank shows an increase in the NPA, it means the bank is unable to keep control of its profitability. It is a negative impact on its credibility of it.
Increasing NPA in commercial banks erodes away its capital and destabilizes the confidence of its depositors. They withdraw their money, and it collapses the bank.
NPA funding in India has been done to control the problem. The government is taking the best possible measures to keep the figure of NPA under control. Regulations have been made strong so that there are lesser flaws in the system.
With the better methods of NPA management, there will be lesser chances of debts going unpaid, which further reduces the profit margin.