Thursday, 19 May 2016

Non Performing Assets (NPA) Definition, Types and Important Points

Dear mm expert readers. 
Today we are presenting Banking awareness free study notes for our readers. One of the most important question asked in bank interview is "Why NPA is so high in PSU banks?"
If you are going to appear for even bank PO interview then you should learn this concept.

You know that the various items that appear in the balance sheet of a bank. In this article you must learn basics highlights the meaning of NPAs, the prudential norms on Income Recognition and Asset Classification and Provisioning. NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. 

Definition of Non Performing Assets (NPA): 

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 to customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.

According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Assets (NPA). 
However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.

For Long Duration Crops, the above would be 1 Crop season from the due date.

NPA definition II :

This is another II definition foryour clera understand. NPA stands for Non-Performing Assets. Loans given by Banks are its assets. Banks have the right to receive the amount back from the loan taker – right? – thus, ‘Loans and Advances’ given by banks are their assets.

When such asset does not perform it becomes an NPA. Simple enough?!

Important Points you must know about NPA:

  1. The first master circular on NPA came in the year 1993, and subsequent amendments were made to it. 
  2. An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.
  3. A meeting with all the bankers highlighted that all banks mandatory follow the NPA norms on Asset classification and provisioning and they constantly make amendments in their working and accounting procedures in the line of RBI guidelines which keeps on changing from time to time. Almost every banks have an NPA and recovery cell to monitor the NPA accounts and prevent slippages.
  4. An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.


1. Gross NPA
2. Net NPA 

Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the real NPAS and the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs /Gross Advances

Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA is obtained by reducing the provisions from Gross NPAs and shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs  and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following:
Net NPAs = Gross NPAs – Provisions on Gross Advances

Example of NPA 

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date).

  • It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days) 
  • It will be Sub-standard from August 30, 2010 till August 29, 2011 
  • It will be doubtful from August 30, 2011 till August 29, 2012 
  • It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years.

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