What is Non-performing Asset (NPA)

Non-performing Asset is an asset that does not generate any income for the bank. Loans are categorised as NPA when the borrowers fail to make repayments for more than 90 days from the due date.

Non-performing Asset is the loan given by a bank on which previously agreed upon interest payments or repayments are not being received by the bank on time and has remained overdue for a period of 90 days. NPA is an asset that does not generate any income for the bank.

As per RBI guidelines, a term loan 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 called a Non-performing Asset.

In the balance sheet of the bank, loans made to customers are shown as assets and when customers who have taken the loan stop making their interest payments or principal repayments, the value of the loan assets starts declining in the balance sheet. The higher is the amount of NPAs, the weaker will be the bank's revenues.

Types of NPA

NPAs are categorised into 3 major types:

1. Substandard Assets: Assets which has remained NPA for a period less than or equal to 12 months
2. Doubtful Assets: An asset which has remained in the substandard category for a period of 12 months.
3. Loss Assets: If the loan is not repaid even after it remained a substandard asset for more than 3 years and it has been identified as unrecoverable by internal / external audit and it would be called Loss asset. As per RBI, "Loss 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."

For Agriculture Loans, there is some change while classifying loan as NPA as mentioned below:

1. For short duration crop agriculture loans such as paddy, Jowar, Bajra etc., if the loan instalment / interest is not paid for crop seasons from the due date, it would be classified as a NPA.
2. For Long Duration Crops, if the loan instalment / interest is not paid for 1 crop season from the due date, it would be classified as a NPA.

Banks can neither credit the income nor debit the loss unless either recovered or identified as loss in case of NPA.

Gross NPA

It is the amount which is outstanding in the books of bank regardless of any interest.

Net NPA

It is Gross NPA minus interest debited to borrower's account and not recovered as income.

If a bad loan has remained NPA for minimum of 2 years, the bank can resale such bad loan to the Asset Reconstruction Companies e.g. Asset Reconstruction Company (India) (ARCIL). Asset Reconstruction Companies purchase such bad loan on very less amount and then try to make maximum possible recovery of such loans from the defaulters.

NPA Provisioning

NPA provisioning refers to setting aside an amount for NPAs by the banks from their profits or income in a particular quarter, for those assets that may turn into losses in the future. In this way, the banks can maintain a healthy book of accounts by provisioning for bad assets.