Introduction to NPAs

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Introduction
to
Non Performing Assets
(NPAs)

2
www.loanXpress.com April 2017
Introduction
The assets of the banks which don’t perform (that is – don’t bring any return) are called Non
Performing Assets (NPA) or bad loans
Bank’s assets are the loans and advances given by the Bank to it’s customers. If customers don’t pay
either interest or part of principal or both, the loan turns into a bad loan
According to RBI, Term Loans on which interest or instalment of principal remain overdue for a period
of more than 90 days from the end of a particular quarter is to be declared as a Non-performing Asset
A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or
instalment of Bond finance principal has remained 'past due' for a specified period of time
NPA is used by financial institutions that refer to loans that are in jeopardy of default

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Terms to Know
Standard Asset
 If the borrower regularly pays his dues regularly and on time; bank will call such loan as its
“Standard Asset”.
 As per the norms, banks have to make a general provision of 0.40% for all loans and
advances except that given towards agriculture and small and medium enterprise (SME)
sector.
 However, if things go wrong and loans turn into bad loans, the PCR would increase
depending up the classification of the NPA as discussed in next section.
Provisioning Coverage Ratio
 For every loan given out, the banks to keep aside some extra funds to cover up losses if
something goes wrong with those loans. This is called provisioning.
 Provisioning Coverage Ratio (PCR) refers to the funds to be set aside by the banks as
fraction to the loans.
Implications of the NPAs on Banks
 The most important implication of the NPA is that a bank can neither credit the income
nor debit to loss, unless either recovered or identified as loss.
 If a borrower has multiple accounts, all accounts would be considered NPA if one account
becomes NPA.

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NPA and SARFAESI Act
 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues.
 When a borrower makes any default in repayment and his account is classified as NPA; the secured
creditor has to issue notice to the borrower giving him 60 days to pay his dues.
 If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell
it; as per provisions of the SAFAESI Act.
Reselling of NPAs
 If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset
Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).
 These sales are only on Cash Basis and the purchasing bank/ company would have to keep the
accounts for at least 15 months before it sells to other bank. They purchase such loans on low
amounts and try to recover as much as possible from the defaulters. Their revenue is difference
between the purchased amount and recovered amount.

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Classification
Gross NPA and Net NPA
The NPA may be Gross NPA or Net NPA
In simple words, Gross NPA is the amount which is outstanding in the books, regardless of any interest
recorded and debited.
Net NPA is Gross NPA less interest debited to borrowers account and not recovered or recognized as
income.
RBI has prescribed a formula for deciding the Gross NPA and Net NPA
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).
Gross NPA = It is the total number of NPAs of the bank simply added

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Introduction to NPAs

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