Non Performing Assets (NPA)
NPAs refer to loans which are in risk of default. Reserve Bank of India (RBI) defines NPAs as below:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
As per guidelines issued by the RBI, banks classify an account as NPA only if the interest due and charged on that account during any quarter is not serviced fully within 90 days from the end of the quarter.
Conditions to become NPA
An asset becomes NPA when it ceases to generate income for the bank –
- Term Loan – Interest and/or installment of principal amount remain overdue for more than 90 days
- Overdraft / Cash Credit – The account remains ‘out of order’ for 90 days
- Bill – The bill remains overdue for more than 90 days in the case of bills purchased and discounted
- Short duration crops – The installment of principal or interest remains overdue for 2 crop seasons
- Long duration crops – The installment of principal or interest remains overdue for 1 crop season
- Securitisation transaction – The amount of liquidity facility outstanding for more than 90 days
- Derivative transaction – The overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for 90 days from the specified due date for payment.
Basis of Classification of Non Performing Asset (NPA)
Banks are required to classify NPAs into the following 3 categories based on how long do they remain non-performing.
The three categories are – Substandard Assets, Doubtful Assets and Loss Assets.
♦ Substandard Assets – If an account remains as NPA for a period less than or equal to 12 months
♦ Doubtful Assets – An asset would be classified as doubtful if it has remained in the substandard category for 12 months.
♦ Loss Asset – A loss Asset is one where loss has been identified by the bank’s internal or external auditors or upon an RBI inspection.
Example of NPA
We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So
♦ It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date)
♦ It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days)
♦ It will be Sub-standard from August 30, 2010 till August 29, 2011
♦ It will be doubtful from August 30, 2011 till August 29, 2012
♦ It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years
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