Pratinav Mishra
Non performing asset meaning are loans or advances made by banks and financial institutions that have stopped generating income for the lender.
In simple terms, NPA meaning in banking are those assets that are considered nonperforming when the borrower fails to make timely payments of principal and interest for a specified period, usually 90 days or more. NPAs indicate a higher risk of default and financial instability.
They can include various types of loans such as personal loans, business loans, mortgages, and credit card debt. Banks strive to minimise NPAs as they impact profitability and require provisioning for potential losses.
Some of the Non Performing Assets of bank examples are:
Non-Performing Loans (NPLs) in banking
Defaulted mortgages
Unpaid credit card debt
Overdue business loans
Bad debts in the corporate sector
Non-performing assets in agriculture
How Do NPAs Work?
Non performing assets are recorded on the balance sheet of banks and financial institutions. When borrowers consistently fail to make loan payments, the lenders take steps to recover the outstanding debt. If the borrower had pledged assets as collateral, the lender may seize and sell those assets to recover the amount owed. In cases where no collateral was pledged, the lender may classify the loan as a bad debt and sell it to a collection agency at a discounted price.
The classification of a loan as an Non Performing Asset is typically based on the duration of non-payment, which is commonly set at 90 days. However, this timeframe may vary depending on the terms of the loan. It’s important to note that an NPA can be identified at any point during the loan’s term or even at its maturity.
What are the Causes of NPA?
1- Economic Downturns: When the economy is in a downturn, businesses may experience financial difficulties and may be unable to repay their loans.
2- Borrower Fraud: In some cases, borrowers may deliberately default on their loans in order to avoid repaying them.
3- Poor Lending Practices: Banks may make loans to borrowers who are not creditworthy. This can lead to NPAs if the borrowers are unable to repay their loans.
4- Lack of Monitoring: Banks may not adequately monitor borrowers’ repayment records, which can lead to NPAs.
5- Changes in the Economic Environment: Changes in the economic environment, such as a rise in interest rates or a decline in commodity prices, can make it more difficult for borrowers to repay their loans.
Can we manage NPA- Road ahead:-
NPA can be managed by the following.
1- Early label and sort: Banks must have a vital system to spot NPA accounts at the before. Any default in payment of principal or interest for 90 days should be faded as an NPA per RBI norms. Banks should rightly classify NPA accounts as sub-standard, suspect or loss assets.
2- Regular follow-up and monitoring: Banks should regularly follow up with defaulting borrowers through phone calls, letters, emails and even personal visits. The objective is to remind borrowers about repayment obligations, know reasons for default and try to work out resolution plans. Banks may offer benefits like extending loan tenors, waiving penalties, etc.
3- Loan restructuring: Where viable, banks may restructure NPA loans by rescheduling repayments, feeding moratoriums, easing interest rates, etc. The goal is to make the loan tolerable and better banks’ cases of full or partial recovery. Yet, frequent restructuring should be evaded.
4- Collateral invocation: Banks can invoke the security (collateral) against NPA loans and sell the assets to recover funds. Yet, poor collateral valuation and delayed legal methods for asset sale pose challenges to good collateral request.
5- Filing of legal cases: Where efforts to recover NPAs fail, banks must quickly initiate legal proceedings against willful defaulters. They can file cases in Debt Recovery Tribunals and the National Company Law Tribunal under the Insolvency and Bankruptcy Code for the speedy solution of NPAs.
6- Provisioning for losses: Banks must make fair provisions for loan losses to account for likely write-offs against NPAs. This helps reduce the effect of NPAs on banks’ profitability. Provisioning needs are set by the RBI.
7- Making internal powers: Banks must better their internal methods, scanning tools, staff skills and governance forms to better detect, control and resolve NPAs in the long run. Technology can be key in tracking loans, placing red flags and streamlining processes.
By following these steps in an integrated manner, banks can manage their NPAs more effectively and minimize losses, although external reforms are also needed to improve the overall NPA resolution web.
