NON-PERFORMING ASSET (NPA) - 15 Mints Seminar Notes

 NON-PERFORMING ASSET (NPA) - 15 Mints Seminar Notes

Asset Classification:

For overall understanding about NPA’s first of all we should know about the asset class tounderstand the structure on how an account is tagged as NPA.

Performing Asset (Standard Asset):

An performing asset is an asset in which a steady stream of income is received(Interests or Emi’s)in regular intervals without any arrears in the payment by the banks or financial institutions against the loan or advances given.

Non-Performing Asset:

            A Non performing asset is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. NPA are listed on the balance sheets of a bank or other financial institution. After a prolonged period of non-payment the lender will force the borrower to liquidate any asset that were pledged as a part  of the debt agreement, if no agreement were pledged, the lender will write off the asset as a bad debt  and then sell it at a discount to a collection agency.

Categories of NPA:

            NPA are further categorized into three different types based on the time duration and other factors which relatively differs with one another. Banks are required to classify non performing assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues.

The Three Categories of NPA’s are

• Substandard Asset
  
• Doubtful Asset (D1, D2, D3)
• Loss Asset

Substandard Asset:

Substandard category asset would be the one which has remained as a NPA for a period any where between 90 days to 1 year. To certainly understand this if a advance or loan repayment notpaid by the borrower for about 15 months will come under substandard asset

NPA Tagged Account   -    Duration          -  Category
                                    -  >= 12 Months    -  Substandard Asset

Doubtful Asset:

  An asset would be classified as doubtful asset 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. Doubtful assets are furtherly classified into 3 different classes as D1, D2, D3.

D1   - Doubtful up to 1 year
D2   - Doubtful 1 to 3 years
D3   - Doubtful more than 3 years

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.

Exception case in NPA:

Although any kind of loan or advance which will be tagged as a NPA for non payment of installment certain loans or advances are made as exception case. They are

•    Over Draft’s (OD)
•    Cash Credit  (CC)
•    Farm Loans

OD & CC:

In respect of Cash Credit / Overdraft accounts, if the account remains “out of order” it is to be classified as NPA. As per RBI guidelines, the account should be treated as “out of order” if the outstanding balance remains continuously in excess of sanctioned limit / drawing power for 90 days.

Farm loans:

                       If Agricultural loans has to be tagged under NPA apart form the usual 90 days period to tag it as NPA rather it will be done considering the crop the farmer is cultivating. It is based on two simple criteria which is

Duration of the crop (Cultivation period)         -       Further Relaxation allowed by the Financial Ins
Long                                                    -         1 crop Duration
Short                                                   -         2 Crop Duration

Provisioning NPA’S:

In simpler terms provisioning means keeping as side a percentage of amount as a security against the loan or  advance provided from the its own pocket. In India RBI guide lines says that for every loan or advance disbursed if it is about to tagged as NPA the provision has to be done so the financial institutions can absorb the liquidity issue occur when a loan is defaulted by the borrowing party. This provisioning differs to each of the category discussed above.

Type of Asset  -  Provisions  -  For Every 100 Rupees lent
Substandard Asset   -   15% (secured), 25% (Unsecured)  -  15 to 25 Rupees
Doubtful Asset   -       40%                    -     40 Rupees
Loss Asset         -       100%                  -     100 Rupees

Gross and Net NPA:

Gross NPA is the summation of the principal and the interest that is left unpaid after the repayment period while Net NPA is the amount obtained on deducting provisions from gross NPA.

EX:

Case 1: 100000 loan for 24 months at 15% Interest sums to 116400and to calculate Gross and net NPA
          Amount paid(5 months) =24250 (116400)
In this case the gross NPA will beAmount pending after that 5 months of payment, and the Net NPA will be amount obtained on deducting provisions from gross NPA which is
Gross Npa    =116400-24250
  =92150 (Gross NPA)
Net Npa         = lets assume it’s a doubtful assets (where 40% provision deducted)
                       =92150-40000
                       =52150(Net NPA)

Case 2:  Lets assume case 2 is a substandard asset without collateral
Gross Npa.     =336000-112000
                       =224000(Gross NPA)
Net Npa.        =224000-75000
                      =149000(Net NPA)

 

Recovering process:

NPA has become one of the reasons for wealth destruction of a nation to tackle this Indian government introduced different methodologies to reduce the number of NPA. Some of the methods are being
•    The Debt Recovery Tribunals (DRTs) – 1993.
•    Credit Information Bureau – 2000.
•    LokAdalats – 2001.
•    Asset Reconstruction Companies (ARC) sale or auctioning
•    Possessions of property.

Presented By           

Naveen Kumar

Banking Student

Magme School of Banking