An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
An NPA is a loan or an advance where;
1. interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
2. the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC).
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
4. the installment of principal or interest there remains overdue for two crop seasons for short duration crops.
5. the installment of principal or interest there remains overdue for one crop season for long duration crops.
6. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
7. 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.
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 realisability of the dues:
1. Substandard Assets
2. Doubtful Assets
3. Loss Assets
1. 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.
2. 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 substandard, 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.
3. 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.
What are the possible steps which can reduce the NPA?
(a) Proper evaluation of credit proposals should be collected.
(b) Banks should be equipped with latest credit risk management techniques to protect the bank funds and minimize insolvency risks.
(c) Timely follow-up is the key to keep the quality of assets intact and enables the banks to recover the interest/installments in time.
(d) Selection of right borrowers, viable economic activity, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas for preventing or minimizing the incidence of fresh NPAs.
Major steps are taken to solve the problems of Non-Performing Assets in India:-
1. Debt Recovery Tribunals (DRTs):
Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established.
2. Securitisation Act 2002:
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose of the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA.
3. Lok Adalats:
Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines issued in 2001. They cover NPA up to Rs. 5 lakhs, both suits filed and non-suit filed are covered. Lok Adalats avoid the legal process.
4. Compromise Settlement:
Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. Compromise Settlement Scheme has applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded.
5. Credit Information Bureau:
A good information system is required to prevent loans from turning into an NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions.