Non Performing Assets

Non-Performing Asset

 Loans and advances given by the banks to its customers are an Asset to the bank.

Just for the sake of simplicity, we can understand that a loan (an asset for the bank) turns as

NPA when the EMI, principal or interest component for the loan is not paid within 90 days

from the due date. Thus a Bad Loan is an asset that ceases to generate any income for the bank.

As per RBI guidelines, NPA is defined as under:

Non performing asset (NPA) is a loan or an advance where;
i.  interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,
ii.  the account remains‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv. the instalment of principal or interest there on remains overdue for two crop seasons for short duration crops,
v. the instalment of principal or interest there on remains overdue for one crop season for long duration crops,
vi. 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.
vii.  in respect of derivative transactions, the overdue receivables representing positive mark-tomarket value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Asset or Loan Classification Norms
The assets or loans are classified as:-
 Standard Assets
 Sub-standard Assets
 Doubtful Assets
 Loss Assets
Now, in order to ensure that banks are not affected due to defaults, RBI has directed the banks to make provisions or set aside money when an account turns bad. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

A Loss Asset is considered uncollectible and of such little value for the bank in retaining the
account on its book and ideally, such loans should be written off. Thus, Loss assets should be written off. If loss assets are permitted to remain in the booksfor any reason, 100% of the
outstanding should be provided for.

Apart from above, there are Guidelines by RBI for provisions under special circumstances.
 ‘Unsecured exposure’ is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/RBI’s inspecting officers, is not more than 10%, abinitio, of the outstanding exposure.
 ‘Exposure’ includes all funded and non-funded exposures.
 ‘Security’ are tangible security properly discharged to the bank and do not include intangible securities like guarantees, etc.
Restructuring of assets
 ‘Standard Assets’ upon restructuring –> ‘Sub-Standard Assets’ .
 Thus, NPA upon restructuring slips into further lower asset classification categories as per
above table.
 Also, an NPA upon restructuring can also be up-graded to the ‘standard’ category after
observation of ‘satisfactory performance’ during the specified period i.e. on repayment of
outstanding amount by the borrower.
Provisioning Coverage Ratio (PCR):
 The ratio of provisioning to gross non-performing assets
 Indicates the extent of funds a bank has kept aside to cover loan losses.
 Related News: PSBs’ profits would have been wiped out were they asked to maintain 70% PCR

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).