A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. These are the assets of the banks which don’t bring any return. 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 (instalment / 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.
Standard Asset
If the borrower regularly pays his dues regularly and on time; bank will call such loan as its “Standard Asset”. A secured loan, is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. An unsecured loan is one that is obtained without the use of property as collateral for the loan, and it is also called a signature loan or a personal loan.
Provisioning: For every loan given out, the banks to keep aside some extra funds to cover up losses if something goes wrong with those loans.
Classification of NPAs
- If the borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as follows:
- 15% of outstanding amount in case of Secured loans
- 25% of outstanding amount in case of Unsecured loans
- If sub-standard asset remains so for a period of 12 more months; it would be termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows:
- Up to one year: 25% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
- 1-3 years: 40% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans
- more than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans.
- If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal / external audit and it would be called loss asset. An NPA can declared loss only if it has been identified to be so by internal or external auditors.
Gross NPA is the amount which is outstanding in the books, regardless of any interest recorded and debited. Net NPA is Gross NPA less interest debited to borrower account and not recovered or recognized as income.
Reasons for Growth of NPAs
- Due diligence not done in initial disbursement of loans. Eg: loans given to road sector even before acquisition of land by the contractors.
- Inefficiencies in post disbursement monitoring of the problem
- Diversion of funds by companies for purposes other than for which loans were taken
- Restructuring of loans done by banks earlier to avoid provisioning. Post crackdown by RBI, banks are forced to clear their asset books which has led to sudden spurt in NPAs
- Economic downturn seen since 2008
- Global demand is still low due to which exports across all sector has shown a declining trend for a long while now
- Economic Survey 2015 mentioned over leveraging by corporate as one of the reasons behind rising bad loans
- Policy Paralysis seen during UPA 2 regime affected several PPP projects and key economic decisions were delayed which affected the macroeconomic stability leading to poorer corporate performance
- Crony capitalism is also to be blamed. Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed
- In the absence of a proper bankruptcy law, corporate faced exit barriers which led to piling up of bad loans
Impact of NPAs
- Banks have to adhere to the provisioning norms set by RBI for the bad loans which eats into their profitability. This leads to banks having lesser capital to deploy, shareholders losing money and banks finding it tough to survive in the market.
- Rising of NPAs will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
- If banks do not classify an asset as NPA, they naturally have more money to advance to earn interest income on. If large NPAs goes unreported, the bank could reach a situation, where it has advanced more money than it has available leading to a situation of technical bankruptcy.
- It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan. This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital. The trend may continue in a vicious circle and deepen the crisis.
- In light of attaining the Basel norms, the burden on maintaining Capital Adequacy Ratio increases.
- For economy, NPAs are disadvantageous as banks become more circumspect in giving loans which affect the credit offtake in economy. India is still an economy which is largely dependent on banks to raise capital as the bond market is not that well developed. This leads to declining Gross Capital Formation affecting economic growth.