What is an NPA?

The Reserve Bank of India defines, Non Performing Assets as any advance or loan that is overdue for more than 90 days.

NPA stands for Non-performing Asset.
A loan is considered to be an NPA (non performing asset) after 90 days delay in the payment of interest and repayment of principal.
NPA is a result or a by product of a bad loan. A bad loan is defined as the loan which has not been ‘serviced’ for a significant period of time.
Servicing of a loan means to pay back the interest and a certain percentage of principal amount as per the agreement between the borrower and the lender.
All the advances and loans sanctioned by financial institutions are considered to be ‘assets’ as they are capable of earning revenue for the lender by the way of generating interest income. However, things do not always work out as planned, a loan is considered bad when it is unable to generate interest, non-payment of principle and doesn’t serve its purpose.

Table of Contents

Financial Institutions are Categorised Under Two Asset Classes:

1. Standard Assets: The standard assets consist of regular and stressed assets. The regular assets generate regular interest and repayment of principal whereas, the stressed asset has a delay in the repayment of principal and interest payment.

2. Non-Performing Assets (NPA): The NPA is further divided into three types.

Substandard asset is an asset which has remained an NPA for a period less than or equal to 12 months. Doubtful asset is an asset which has remained in the substandard category for a period of 12 months. Loss asset is identified as a probable loss but not written off yet.

Classification of NPAs:

Substandard Asset: Assets which have been an NPA for a period less than or equal to 12 months.

Doubtful Asset: Assets which have remained in the substandard category for a period of 12 months.

Loss Asset: Assets which has been identified as a probable loss by the lender but not written off yet.

Gross Non Performing Assets (GNPA)

GNPA is the summation of all the loans which have been defaulted by borrows from the financial institutions (lenders).

Ratio= % of GNPA / Total Assets

Net-Non Performing Assets (NNPA)

NNPA= GNPA- Provision for Doubtful Debts

As the name suggests, net non-performing assets mean the actual loss which the lender has to incurr; the actual amount which is defaulted by individuals. NNPA is smaller than the GNPA.

NNPA is asserted by subtracting the provision for doubtful Debt maintained from the gnpa.

Ratio= NNPA / Total Assets

Reasons for the Growth of NPAs:

Over Optimism: Majority of the loans are sanctioned during the period of robust economic growth, which may turn bad due to over optimism.

Provision: Financial institutions have to compulsorily maintain a provision for doubtful debts, which results in the decrease in the amount of credit it can sanction. For example, A company has the ability to sanction a credit of Rs 100 crores but it has to maintain a certain provision as per the law. If it sets aside Rs 10 crores it can now lend Rs 90 crores to the borrowers.

Thorough Checking: Loans sanctioned through NBFCs do not required much paper work which leads to dispute in the long run.

Over running of Expenditure: Contract delays, over running of costs, result in the growth of NPAs.

Credit to MSMEs: Increase in the approval of loan to MSME for development, result in the growth of NPAs.

Structural Inefficiencies: Lack of analysis, monitoring, stringent rules and regulations result in the evergreening of loans (further issue of loan in order to repay an existing loan) instead of restructuring, taking strict action to recognise the asset.

How NPAs Affect the Financial Institutions?

Financial Performance: The growth of NPAs result in the non-payment of interest and principal amount which cause financial losses and further affects the balance sheet of the financial institution. The financial performance decline to a great extend due to the increase in NPAs.
Provision: Banks have to maintain a provision for NPAs, which further reduce the capital base.
Liquidity: Setting aside a certain percentage of capital base for provision affects liquidity, it refrains banks from lending.
High Interest Rate: To keep up with the profit percentage, financial institutions increase the Interest rate which further affects the economy.