Explain in detail about NPA in Banking Sector?

What is NPA?

  • NPA in terms of RBI regulations result out of non-payment of interest for a period of 90 days or non-payment of principle amount for 90 days or more. So beyond that point, it is called Non-Performing Asset. The loan is taken by the company on its assets from the bank. When the asset is not performing because they become doubtful and NPAs from doubtful become bad loans.
  • Before the period of 90 days, they are calledStressed Assets.Stressed assets= NPAs + restructured loans + Written Off Assets.

Types of stressed Assets:

  • Sub-standard Assets-If borrower fails to repay the installment, interest on principal or principal for 90 days the loan becomes NPA and it is termed as Special Mention Account (SMA). If it remains SMA for a period less than or equal to 12 months it is termed as Substandard Assets.
  • Doubtful Assets-If the Sub-standard assets remains so for 12 months or more, then it would be termed as Doubtful Asset.
  • Loss Assets-If the loan is not repaid even after it remains substandard for more than three years it would be called as loss Asset.
  • Written Off Assets-Written off assets are those on which the bank or lender doesn’t count the money borrower owes to it.

The following have caused distress in the banks’ assets and have played part in the mounting NPAs –

  • Prolonged downturn in the world economy,
  • Falling commodity prices,
  • Lack of due diligence and adherence to rules (inadequate and poor risk assessment of the proposals by the banks)
  • Complex workings of the bureaucracy,
  • Typical bureaucratic red tape,
  • Long delays and gestation periods of several infrastructure projects,
  • Delays in land acquisition and
  • Politically inspired agitations

The NPA “SAMADHAN” Project:

  • Resolution process must move on smoothly – and not be stalled by long drawn legal wrangling’s. Longer the delay, the resolution of assets will be postponed further. The capital that is blocked in the NPA would not yield anything and will continue remaining stressed.
  • It is important to recognize that even if we could resolve quickly, no matter the amount of “haircut” there exists a major upside for both the economy and the bank:
  • For Economy: 1000 of stalled projects will come back contributing to the growth and positive GDP evaluation
  • For Bank: As they have been provided for 100% for the stressed assets, at least their financial health would turn better.
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