What is a Non Performing Asset

Non performing Assets (NPA) –

Any asset, including a leased asset, becomes a non performing when it ceases to generate income for the bank are called Non Performing Assets or Bad loans.

As per RBI guidelines, NPA is defined as under:

Non performing asset (NPA) is a loan or an advance where:
Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC).
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
The installment of principal or interest there on remains overdue for two crop seasons for short duration crops.
The installment of principal or interest there on remains overdue for one crop season for long duration crops.
The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006.
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).

What is Non-Performing Assets (NPA)?

In simple words, the assets of the Banks which don’t perform (means don’t bring any return) are called Non Performing Assets. In more general sense they are “bad Loans”.

Any asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

However, there is a prescribed definition by the RBI which defines the NPAs as:

Terms Loans on which interest and / or installment of principal remain overdue for a particular quarter for a period of more than 90 days from the end of that particular quarter.
The Bills those remain overdue for a period of More than 90 Days from the end of a quarter.
Any amount to be received remains overdue for a period of more than 90 days.
The Cash Credit account remains out of order for a period of more than 90 days. Out of order means over the sanctioned limit.

Categories of NPAs

Banks are required to classify nonperforming assets further into the following three categories based on the period for which the asset has remained nonperforming and the realise-ability of the dues:

Substandard Assets
Doubtful Assets
Loss Assets

Substandard Assets

With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Types of NPA

Gross NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA is advance which is considered

irrecoverable, for bank has made provisions, and which is still held in banks’ books of

account Gross NPA reflects the quality of the loans made by Banks. It consists of all the

nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs / Gross Advances

Net NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the Central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following

Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions