Non Performing Assets (NPA) – Brief Concept

A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time. Non-performing assets are one of the talking points of banks in their performance reports. Almost all banks in India is suffering from the problem of NPA. Here we have discussed the concept of Non-performing Assets.

An Assets, including a leased asset, become an NPA when it ceases to generate income for the bank. An NPA is a loan or an advance where;

  • The Interest and/or Installment of principal remain overdue for a period of more than ninety days in respect of a term loan,
  • An account remains ‘out of order’ as indicated in the article below, in respect of an overdraft/cash credit (OD/CC).
  • A bill remains overdue for a period of more than ninety days, in the case of bills purchased and discounted.
  • An installment of the principal or the interest thereon remains overdue for one crop season for long duration crops.

Banks should classify an account as an NPA only if the interest charged during any quarter is not serviced fully within ninety days from the end of the quarter.

‘Out of Order’ status:

An account is treated as ‘out of order’, if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases, where the outstanding balance in the operating account is less than the sanctioned limit/ drawing power, but there are not credit continuously for ninety days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.

Categories of NPAs:

Banks are required to classify non-performing assets into the following three categories based on the period for which the asset has remained non-performing and reliability of the dues:

  • Substandard Assets – An assets which remained a NPA for a period less than or equal to twelve months (With Effect from March 31, 2005).
  • Doubtful Assets -An assets would be classified as doubtful assets if it has remained as Substandard Assets fore more than twelve months (With Effect from March 31, 2005).
  • Loss Assets – A loss assets is one, where the bank of internal or external auditors or the RBI inspection has identified the loss but the amount has not been written off wholly. In other words, such little value that it’s continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

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