Non Performing Assets (NPA) - Meaning, Types and Causes

A non-performing asset (NPA) is the payment of the principal or interest against a loan or advance that remained due for a period of 90 days. According to the terms of RBI, if any installment or principal in regards of a loan remains overdue for a period of 90 days at the end of a particular quarter is known as a Non-Performing Asset. Whereas in agricultural terms, if loans in form of paddy, Jowar, Bajra etc is not paid for 2 crop seasons then it would be termed as a NPA.

Non Performing Assets can further be classified into the following:

Substandard assets: Those assets that has has remained as NPA for less than a year or so can be termed as substandard asset.
Doubtful assets: Those assets which has remained in the substandard category for a period of 12 months are termed as doubtful assets.
Loss assets: According to RBI Loss asset can be defined as an amount that is considered to be uncollectible and it is of such little value that its continuance as a bankable asset is not considered though there might be a little amount or recovery value.

Reasons for the rise in NPA in recent years

Due to Economic Downfall and Low GDP - The Indian economy was quite in a boom during the period of 2000 to 2008. As a result a lot of money was lent to the corporate institutions during this phase especially by the public sector banks. However, due to slow down in economy the profits were very low. As a result the overall GDP fell down. Other than that closing of projects, problem in getting environmental approval and other such conditions there was a lot of problem in recovering back loans. This was one of the reason for the increase in NPAs of these banks.
Another reason is the lending of loans to corporate stars without proper verification and analysis of their financial credit. Moreover, banks are selling huge loans without proper verification just to excel in the competition of banking.
Many sectors like Textile, aviation, mining, Infrastructure contributes the most to the NPA because most of the loans are given here by the public sector banks. These account for most of the Non Performing Assets.
Around 80 % of the credit is provided to the industries by the Public Sector banks and this forms a huge part of the NPA. Last year SBI had provided a huge loan to Kingfisher which was not possible to recover from them.
It is often thought so that NPA in Public sector bank is due to Priority sector lending. However this is not true because according to some recent findings the NPAs in corporate sector are much higher than that of the priority or agriculture sector. However, PSL do contribute minimally to this NPA. Like recently it has been known that educational loans contribute 20% to this.
The lack of proper legal systems makes it difficult to recover loans from corporate and non-corporates.

Problems Caused by NPAs
Some of the repercussions of NPAs are given below:

Many a times depositors do not get rightful returns and may lose uninsured deposits. Banks may charge higher interest rates on some products to compensate NPL losses.
Bank shareholders are adversely affected.
Bad loans results in redirecting of funds from good projects to bad ones. As a result the economy suffers due to loss of good projects.
Increased NPA may result in liquidity problems.

Steps Taken to Reduce NPA

A project named ‘Mission Indradhanush’ has been launched by government to make the working of public sector bank more transparent and professional in order to reduce NPA loss.
Government has also introduced Bankruptcy code.
RBI has introduced a number of measures in last few years like Corporate Debt Restructuring (CDR) mechanism, Joint Lenders' Forum, prodding banks, increased provisions for stressed assets, and Strategic Debt Restructuring (SDR) scheme.

Short Term measures

There is a need to look at viable accounts properly. Viable accounts need to be given more finance for turnaround and unviable accounts should either be given to Asset Reconstruction Company or restructuring or permitting banks to take over the units.
Bankruptcy code should be passed to make it easier for banks to recover loans from unviable enterprises.
Government should establish Asset Reconstruction Company (ARC) with equity contribution from the government and the Reserve Bank of India (RBI). ARC focuses on removing NPA's from the banking system so that it becomes easier for the banks to focus on their work of lending.

Long term Measures

Improving credit risk management includes credit appraisal, credit monitoring and efficient system of fixing accountability and analyzing trends in group leverage to which the borrowing firm belongs.
Banks should make sure that promoter's contribution is funded through equity and not debt.
Banks should plan and analyze for such projects before confirming any plan. Moreover they should also have backing plan in advance for such situations.
Develop an early warning mechanism and comprehensive MIS(Management Information System) can play an important role in it. MIS should be able to identify problem accounts, read early signs and informa them to management on these aspects.
Loaning decisions are taken at higher level so the sanction official should also share the burden of responsibility.
Restructured accounts should be treated as non performing asset and technical write offs where banks remove NPA's from their balance sheets permanently should be dispensed with.
Address corporate governance issues in PSB. This include explicit fit and proper criteria for appointment of top executives and instituting system of an open market wide search for Chairman.

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Non Performing Assets (NPA) - Meaning, Types and Causes