Non Performing Assets

Non-performing assets are bad loans. Any asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. As per the guidelines issued by the Reserve Bank of India (RBI), banks 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.

Asset Classification:

banks are required to classify NPAs into the following three categories based on the period for which the asset has remained Non-performing and realisability of the dues.

a) Substandard Assets

b) Doubtful Assets

c) Loss Assets

Substandard Assets: If an account remains non-performing for less than or equal to 12 months.

Doubtful Assets: If an account remains in the substandard category for a period of 12 months

Loss Assets: Where loss has been identified by the Bank, internal or external auditors or RBI inspection. Such asset is considered uncollectible.

What banks do to tackle the menace of NPA:

Banks have to keep aside extra funds, called provisioning in banking parlance, for standard assets as well.

1. Loss assets are written off from the books

2. In case fo doubtful assets, Up to one year there is 20% provision requirement

For one to three years, there is 30% and for more than three years, provision requiremnet is 100%

3. 10% provision on the total outstanding amount is made if loan is secured. and for unsecured loans, which are identified as 'substandard' would attract 10% additional provision (20% totol)

4. In case of standard assets (Assets which does not disclose any risk)

a) 0.25% for direct advances to agricultural and SME sectors

b) one percent for advances to specific sectors i.e personal loans, loans and advances qulifying as capital market exposure, Housing loans beyond 20 lac and commercial real estate loans.

c) all other advances not included in (a) and (b) at 0.40%

How do banks recover their NPAs?

Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the banks can take legal recourse to recover their dues. If a borrower makes any default in repayment and his account is classified as NPA, then the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. 

If the dues are still not paid, the bank can take possession of the assets and can also give it on lease or sell it.

Bank can also sell their NPAs?

A bank can sell NPA from its books to asset reconstruction companies such as ARCIL only if it has remained NPA for at least two years. Such sale can take place only on cash basis. The purchasing bank has to keep the accounts in its books at least for a period of 15 months before it is sold to other banks. The purchased NPA may be classified as ‘standard’ 

in the books of the purchasing bank for a period of 90 days from the date of purchase.