A bank‟s balance sheet will have performing as well as non performing assets. Performing asset means an asset on which interest income is received from the borrower as and when it is due and the principal is also repaid on due date as per the repayment schedule agreed between banker and borrower. Hence an asset which is not a performing asset is treated as non performing asset. It mean that an asset on which interest or principal is not received when due. The RBI took a decision that if this amount is not recovered within 90 days from the date it becomes due, it would be treated as NPA. Before 31.3.2004 this period was 180 days. Now banks can‟t show the interest income on such amount as receivable income and thus cannot increase their profit by crediting the same in Profit & Loss A/c.
Hence in simple words, an asset which ceases to earn income is treated as NPA. However, there are exceptions in this regard such as :
1. Loans guaranteed by Central & State Governments.
2. Loans against FD/NSC/IVP/KVP if adequate margin has been maintained.
3. Loans which have been rescheduled for the purpose of repayment.
Gross & Net NPA –
Gross – Total amount of NPA before making provision for NPA
Net – Total amount of NPA Less provision made for NPA
Hence after making provisions for NPA, many banks have 0% net NPA‟s in relation to total loans and advances.
Classification NPA‟s & Provisioning Norms
1) Sub-Standard assets: An asset which remain NPA for not exceeding 12 months. General provision of 10% is required to be made
(2) Doubtful Assts: An asset which remained in sub standard category for 12 months. Provision is required to be made according to the period. Further 100% provision on unsecured portion of asset.
(3) Loss Assets: Assets which are not recoverable, provision @ 100% is to be provided till written off.
Further general provision is required @ .25% on standard asset. These are assets which carry normal risk and are not NPA. This classification as well as provisioning is required to be made as per latest guidelines issued by RBI in this regard.
Reasons for rise in NPA‟s
1. Deffective lending policies
2.Poor credit appraisal
3.Improper SWOT analysis
4.Lack of information base about loan becoming NPA
5.Absence of regular contact/visits to the borrowers
Government initiative to overcome problem of NPA‟s
1. Sick Industrial Companies Act 1985
2. Board of Industrial & Financial Reconstruction (BIFR) 1987
3. Recovery of Debts due to Banks & Financial Institutions (RDDBFI) Act 1993
4. Corporate Debt Restructuring- To Preserve viable corporates
5. SARFAESI Act 200