The full form of NPA is Non Performing Assets. NPA is nothing but the loans given by banks to their customers and other operating financial institutions whose interest and the principal amount is in the state of overdue for a long time. When we say, “a long time”, it means more than 90 days.
Since banks and financial institutions are supposed to be profitable, such non-performing assets should be minimum. Therefore, NPA is not a desirable phenomenon in the banking system in India. It destroys the business performance and affects profitability adversely.
RBI or Reserve Bank Of India is the regulatory authority in India. It gives clear-cut guidelines and a framework for NPA and npa account settlement.
What is NPA according to RBI?
The first condition is that if the installment or interest of a principal remains overdue for a continuous period of more than 90 days in respect of a term loan, then it is called NPA.
Any account will be called “out of order” with respect to CC or OD (Cash, Credit, and Overdraft).
If a bill remains overdue for over 90 days.
If the installment is overdue (both principal or interest) for two crop seasons if the crop grows for a short period.
If the installation is overdue (both principal or interest) for one crop season if the crop season is long duration.
If the outstanding amount of liquidity is more than 90 days continuously.
Thus, RBI gives a comprehensive definition of NPA that covers every possible scenario. When a bank or financial institution has more numbers of NPA, then it cannot survive for a long time.
It is essential that the bank or financial institution follows methods of npa account settlement.
Types of NPA
RBI also gives guidelines about various types of NPA.
- Substandard NPA: This NPA remains overdue for less than or equal to 12 months.
- Doubtful NPA: This NPA remains in the category of Substandard NPA for less than or equal to 12 months.
- Loss Assets: When the Reserve Bank of India does the inspection and an NPA is recognized as a loss incurred asset by the bank or financial institution, it is declared as a Loss asset.
Provisioning norms for NPA
The Reserve Bank of India or RBI also sets the norms of provisioning. These norms are the same for all banks. There could be a variation to the extent as per the category of the NPA.
The norms are as follows:
- There is an applicable allowance of 10 percent for the total unpaid amount. It can be done without making any kind of budget for the securities or any other coverage of the guarantee given by the government.
- There is further 10 percent coverage that makes the total of 20 percent of the total outstanding in case the NPA falls in the substandard category.
- For an unsecured or doubtful NPA, the provisional requirement is declared to be 100 percent.
Measures that are taken by RBI to prevent NPA
- The community of leaders should adhere to stringent timelines for npa account settlement plan.
- Lenders should give incentives for agreeing to the NPA resolution plan.
- Restructuring of large values and improvement in the present restructuring procedure should have incentives.
- To facilitate the better functioning of Asset Reconstruction Companies, necessary steps should be taken.
- In the market of stressed assets, a sector-specific company or a private equity company should be helped to play a role.
NPA or Non Performing Assets are not a good thing for the health of a financial institution. Therefore, RBI has issued guidelines for managing and recovering NPAs.