What is a Non-Performing Asset? Important Facts to Know

A non-performing asset meaning states that a borrower has taken a loan and fails to repay the EMI on time. While lenders are lenient if you miss one or two EMIs, NPA can have some serious consequences for the borrower.

The borrower can face a decreased credit score and lowered creditworthiness. On the other hand, the banks will lose the stability and liquidity to provide more loans. Read on to learn what is NPA, how it works, its impact on the banking system, and more. 

What is NPA in Banking?

In simple terms, it is if a loan payment is due for more than 90 days. When the borrower has missed out on the payment, the bank will mark the loan as NPA. Also, the borrower is marked as a defaulter. 

On the other hand, if the loan repayment is made on time, it will be called a standard asset. According to the RBI guidelines, banks overall classify NPA in three categories.

1. Sub-Standard Assets

These loans are due for more than 90 days or less than 12 months. As per RBI guidelines, this applies only when the loan terms have been re-negotiated, and the borrower has not yet repaid the loan amount. 

2. Doubtful Assets

If the borrower has not made payment toward the loan for more than 12 months, it is classified as a doubtful asset. 

3. Loss Assets

If the borrower defaults for an extended period, the lender marks the loan as a loss on the balance sheet. This loan becomes ‘uncollectible’, and its value is not worthy enough to be considered as a bankable asset. However, it is not written off wholly or in parts. Thus, it may have some recovery value.

How do NPAs Work?

In addition to knowing the NPA classification, you must know how an asset is declared as an NPA. In instances of non-payment, the lender offers a grace period of 90 days. Only after this grace period does the lender move further. 

If this situation occurs, the bank or lender will send a notice to the pledger and will enable an auction for the collateral to regain the loan capital. This will comfort the lender’s load as they can remove NPA loans from their financial statement.

What are GNPA and NNPA?

Lenders take precautions for such cases and keep a certain amount from their profits aside every quarter to deal with NPAs. With these provisions, banks keep their accounts and balance sheets protected. 

To calculate the required provisions, the lender measures the number of NPAs using these two metrics:

• Gross Non-Performing Asset: GNPA is the total principal amount and interest due from the NPAs in 90 days 
• Net Non-Performing Asset: NNPA is the value of NPA after considering the provisions (doubtful and unpaid debts) and subtracting the total from the GNPA 

Non-performing Assets Examples

To clearly understand NPAs, here are some examples that better explain the concept. 

Assume that you take a personal loan or a car loan. After paying the EMIs for 3 months or over 90 days, you are not able to pay the remaining EMIs due to financial crisis. So now, because the bank is not earning any interest after providing the loan, it will be declared as NPA. Further, the bank takes steps to recover the same. 

Consider another example, where a borrower takes a business loan of ₹5 lakhs. After paying ₹15,000 for three months, now the business is not gaining profits, leading to economic difficulty. In this case, if the owner does not pay the remaining EMIs, the banks will classify the loan as NPA and take action to cover the loan amount. 

One of the best examples is the case of Kingfisher Airlines. The owner, Vijay Mallya, willing to expand its airline service, thought of acquiring an international Air Deccan in 2007. After dominating the domestic market with a share of 25%, the combined business started to bear losses. In this condition, banks like PSU. HDFC and ICICI provided him with a loan of ₹6,900 crores. By 2010, the business stats dropped and this loan amount became an NPA.

Performing and Non-performing Assets

To better understand the difference between both of these terms in brief, here is a tabular differentiation with an example of each. 

Non-performing Assets	Performing Assets
Loans or advances that do not generate an income for a due time	All types of assets provide a financial return regularly
Principal or interest payments are due for more than 90 days	Regular payment is received by the banks or financial institutions
Low risk due to inconsistency in payments	Higher risk of losses for banks
Negative impact on the lender and borrower	Positive impact on both parties

Impact of Non-Performing Assets in the Banking Sector

An NPA negatively impacts the lender’s income and profitability because earned interest is the main source of banking profit. Not only the profit but it can inversely impact the lender’s reputation.

This may lead to people withdrawing funds from the bank to protect their finances. If a bank runs short on funds, they cannot offer more loans. Thus, NPAs can affect the lender’s overall business. 

How do Banks Recover NPAs? 

Lenders can hire third-party recovery agents or opt for settlement to recover their money. Before that, they discuss the loan terms and sometimes adjust the repayment conditions to give the borrower. After exhausting all the resources, lenders can take the matter to court.  

To avoid losses, here are options available to lenders to recover NPAs: 

• Asset Reconstruction Companies
• Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest Act 2002 (SARFAESI Act)
• Lok Adalat
• Prompt Corrective Action (PCA)
• Debts Recovery Tribunals (DRTs) 
• Debts Recovery Appellate Tribunals (DRATs)

With these facts in mind, you can understand that a non-performing asset can have a huge impact on the banking system. In addition, if you fail to repay your loan and it gets marked as an NPA, your credit score will drop significantly. This will make it challenging for you to access credit in the future. So, ensure you get a loan that fits your repayment capacity. 

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FAQs on Non-performing Assets

Why should customers be concerned about NPAs in banks?

The reason is that NPA directly impacts the overall bank’s financial condition, which directly impacts their existing customer. As such, loans and deposits can be negatively affected, and the interest gains may decrease.

What are common methods banks use to recover NPAs?

Some common methods banks use to recover from NPAs include reconstruction of financial assets, application of the SARFAESI Act, filing a suit against the borrower, prompt corrective action, and DRTs.

How are NPAs classified and reported by banks?

NPAs are classified into three main sub-categories, including sub-standard assets, loss assets, and doubtful assets.

How does NPA resolution impact banking sector stability?

NPAs influence the economic stability of banks by limiting them to provide extra loans and slowing capital growth. A lack of liquidity by banks leads to earning losses on provided loans or advances.