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What is Non-Performing Asset or NPA?
Non-Performing Assets or NPA, as the name suggests, assets which are not performing. Loans given by the banks are assets for the banks. If the borrower who has taken a loan from a bank does not repay the principal amount and interest within the agreed time, then such loan account becomes Non-performing Asset (NPA) for the bank.
Mere delay in making principal and interest payments to the bank does not make an account Non-performing Asset. There is a time limit of 90 days from the due date which is defined under the regulations issued by Reserve Bank of India in this regard. If the repayment of principal amount and interest payment are not done within such timelines, the bank classifies the account as an NPA.
How Non-Performing Asset or NPA is classified?
As per RBI regulations, an asset/loan account shall be termed as NPA if the loan repayments have not been made within a period of 90 days from the due date or as per the terms and conditions of the loan.
NPAs are classified under sub-parts, elaborated as under:
- Standard Asset :
Standard Assets are those which do not disclose any problems and do not carry more than normal risk with respect to the business. Such an asset should not be an NPA. This shall be the classification of the asset before being an NPA.
- Sub-Standard Asset :
A substandard asset is the one which has remained NPA for a period up to 12 months (i.e due date of repayment + 90 days + 12 months). Such an asset has well-defined credit weaknesses that jeopardize the repayment of the loan and are characterized by the possibility that the bank would sustain some loss if deficiencies are not corrected.
- Doubtful Asset :
After being in the category of Sub-standard Assets for a period of more than 12 months, if the default continues, the asset would be classified as Doubtful Asset.
- Loss Asset :
An asset which is an NPA for a period of more than 36 months (i.e. due date of repayment + 90 days+ 36 months) is treated as a Loss Asset. Loss Asset is identified by the Bank or the External/Internal Auditors or RBI Inspectors. Such an asset is considered as uncollectable or if collected shall have a negligible value of recovery.
How do NPAs impact the economy?
NPAs cause a major impact on the economy and business environment, some of the impacts are stated below:
- Lenders suffer due to lower profit margins.
- Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
- Higher interest rates by the banks to maintain the profit margins.
- Redirecting funds from the good projects to the bad ones.
- As investments get stuck, it may result in unemployment.
- Loss of funds impacts the financial strength of the bank.
What are the various steps taken by Government to control NPAs?
Varied Steps are taken by RBI and Government of India to recuperate the concern of NPA in last few years, such as:
- The government has launched ‘Mission Indradhanush’ to make the working of public sector bank more transparent and professional in order to curb the menace of NPA in future.
- The government has also introduced Insolvency and Bankruptcy Code 2016.
Various Rules, Regulations, and Acts have also been passed to curb NPAs:
- The Debt Recovery Tribunals (DRTs)–1993
These Tribunals were established to decrease the time required for settling loan default cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.
- Credit Information Bureau – 2000 – (commonly known as CIBIL)
It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.
- Lok Adalats – 2001
They are helpful in tackling and recovering small loans. However, they are limited up to 5 lakh rupees loans only.
- Compromise Settlement – 2001
It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals), however, willful default and fraud cases are excluded.
- Sarfaesi Act – 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above.
The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:
- Take ownership of security and/or
- Control over the management of the borrowing concern.
- Appoint a person to manage the concern.
- Further, this act has been amended last year to make its enforcement faster, such as Bank takes help of police and mayors in taking over properties.
- Asset Reconstruction Companies (ARC)
The RBI gave license to 14 new ARCs recently after the amendment of the SARFAESI Act of 2002. These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.
- Corporate debt restructuring – 2005
It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.
- 5:25 rule – 2014
Also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries. It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long-term projects.
- Joint Lenders Forum – 2014
It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loan to same individual or company from different banks. It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.
- Bad Banks – 2017
Economic survey 2016 – 17, also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of Public Section Banks (PSBs) giving them the space to fund new projects and continue the funding of development projects.
Government and RBI can speed up the recovery of NPA in following ways:
- Amendment in banking law to give RBI more powers.
- Stringent NPA recovery rules.
- RBI’s loan restructuring schemes.
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