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What happens if a loan account becomes NPA?

Posted Date: 09-01-2023 Posted By: user

What is Non-Paying Assets or NPA? When a person takes a loan from a bank or financial institute and fails to repay, then the loan goes into the NPA category. The bank has no choice other than to seize the mortgaged assets and selling them. There could be complications in this process because the asset will have to be sold at a lower price than the original.

When a loan goes into the category of NPA, banks can transfer the loan into equity. It will bring new promotors or management. It is called SDR or Strategic Debt Restructuring Scheme. It has been a good solution to control the npa in India.

The bank can also help out the borrowers by restructuring the loan. Alternatively, the bank or financial institution can take the following steps:

  • Extend the repayment time
  • Waive some amount of loan or reduce the interest rate
  • Combine these processes

You can sell the  NPA to the Asset Reconstruction Company(ARC). It procures the bad loans or non-performing assets that commercial or other banks issue. In this process, banks can receive a heavy loss. However, the complete loan still exists in the balance sheet. The npa loan takeover process is also one of the various ways of recovering from the problem.

What happens to a loan after NPA?

When a loan becomes an NPA, Non-Performing Asset, the bank has the right to confiscate the property or assets purchased through the loan. The bank can auction the asset so that all outstanding amount against the loan is repaid.

If a loan goes into the NPA category, then lowers the Credit rating of the borrower. It is because the unpaid loan is called a Bad Loan.

Reserve Bank of India (RBI) guidelines mandate banks to classify nonperforming assets (NPAs) at the borrower level and not on a specific loan basis.

Hence, when a borrower does not want to be labeled as a Non-Performing Asset (NPA), it is important that all of the loans are repaid on time.

Recording Nonperforming Assets (NPA)

Banks are supposed to classify nonperforming assets into one of three categories according to how long the asset has been nonperforming:

  • Sub-standard assets:  When an asset is in NPA for less than 12 months.
  • Doubtful assets: When an asset is in NPA for more than 12 months.
  • Loss assets: When an asset is in NPA has to be written off.

NPA or Non-Performing Assets put a negative impact on the economy and they have to be controlled.