Wednesday, 2 December 2015

What is Non Performing Assets?

NPA’s (Non Performing Assets)
 A mortgage in default would be considered non-performing, after a prolonged period of non-payment (90 days)
  • The lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off  the asset as a bad debt and then sell it at a discount to a collections agency.
  • All those assets which don’t generate regular income are known as NPA.
Types of Assets

Classification of Assets:
Non-performing assets are further classified into three categories based on the span for which the asset has remained non-performing and the recovery of the dues:

1. Substandard Assets
With effect from March 31, 2005, a substandard asset would be the one, which has remained as a nonperforming asset for a period of less than or equal to 12 months. Substandard assets have credit weaknesses that jeopardise the liquidation of the debt and there are also possibility of incurring and sustaining some losses if the deficiencies are not corrected.

2. Doubtful Assets
With effect from March 31, 2005, an asset is classified as doubtful if it has remained as a sub-standard asset for a period of 12 months. A loan classified under the doubtful category has all the weakness characteristics as defined for the sub-standard assets; also it has added characteristics that the weakness makes full liquidation or collection, on the basis of the currently known conditions, facts, and values that are highly doubtful and questionable.

3. Loss Assets
A loss asset is one where loss has been identified by the bank’s internal auditors and RBI‟s external
auditors, but the amount has not been written off fully. These kinds of assets are also considered as uncollectible, and of little value that its continuance or maintenance as a bankable asset is not warranted or acceptable though there may be some salvage or recovery value.(RBI Website, n.d.)
Sub-standard assets, Doubtful assets and Loss assets are NPA.

Causes of NPA
In the past articles, many authors have found out many reasons for NPA few are ,
  • Market Failure, Wilful Defaults, Poor follow-up and Supervision, Non-cooperation from Banks, Poor Legal framework, Lack of Entrepreneurial Skills, Diversion of funds
  •  Improper selection of borrower‟s activities, weak credit appraisal system Industrial problem, inefficiency in management of borrower, slackness in credit management and monitoring, lack of proper follow up by bank, recession in the market, and natural calamities and other uncertainties, as the reasons for the NPA.
Private Sector Banks and Public Sector Banks‟has identified few external, internal other factors are,
  • Diversion of fund for expansion, diversification, modernization or for taking up new projects, diversion of fund for assisting or promoting associate concerns,time or cost overrun during the project implementation stage, business failure due to product failure, failure in marketing etc, inefficiency in bank management, slackness in credit management and monitoring, and inappropriate technology or problems related to modern technology.
  • The external factors include recession in the economy as a whole, input or power shortage, price escalation of inputs, exchange rate fluctuations, and change in government policies.
  • Other factors include liberalization of the economy and the consequent pressures from liberalization like several competitions, reduction of tariffs etc
  •  Poor monitoring of credits and failure to recognize early warning signals shown by standard assets, sudden crashing of capital market and inability to raise adequate funds, mismatching of funds i.e. using loan granted for short term for long term transactions, granting of loans to certain sectors of the economy on the basis of government directives rather than commercial imperatives.

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