Non-performing Assets (NPA) in India
What is Non-Performing Assets ?
A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a certain period. Bank consider loan as their Asset. Therefore, if borrower does not repay principal or interest thereupon, then loan turns to be Non-Performing Asset. An asset which doesn’t give returns to its investor for specified time are Non-performing asset. Specified time here is 90 days. However, it is not compulsory for all financial institution. They can change their terms and conditions as agreed by both i.e lender and borrower. When the borrower stops paying interest or principal on a loan, the lender will lose money. Non-performing Assets badly affects Indian economy.
Banks classify NPAs further into :
1. Substandard Assets – Assets which are Non-performing for period of less than or equal to 12 months.
2 Doubtful assets – Assets which are substandard category for a period of 12 months.
Loss assets – A loss asset is one where the bank or internal or external auditors or the RBI inspection has identified loss. However, amount has not written off wholly.
Reserve Bank Of India, Official site, Retrieved on 26th December, 2017
Non- performing Asset is a loan or an advance where :
- Interest or principal remains unpaid to the lender for period of more than 90 days;
- Account remains “Out of Order” Example: Overdraft and also cash credit;
- The bill ( bills of exchange) remains overdue for period of more than 90 days;
- installment of principal or interest thereon remains overdue for two crop seasons for short duration crops;
- installment of principal or interest thereon remains overdue for one crop seasons for long duration crops;
- In securitistaion transaction, liquidity facility remains outstanding for more than 90 days;
- In derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
‘Out of Order’ status
An account is out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In case, where the outstanding balance in the account is less than sanctioned limit/drawing power, but credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.
What can be reasons for Non-Performing Assets?
Following are the reasons for Non-performing Assets:
- Diversification of funds to unrelated business/fraud.
- Failure in complying with Due Diligence.
- Losses due to change in business environmet
- Global, regional or national financial crisis which dissolves the margins and also profit of companies. Therefore, stressing their balance sheet which finally results into Non-performing Assets.
- A general fall in economy of country. Example: After 2011, there was a slowdown in the Indian economy which resulted in the faster growth of Non-Performing Assets.
- Fall in specific Industrial area, which affects the companies that industrial area.
- Unplanned expansion of corporate during boom period. Loan taken at low rates, repaid at at high rates, therefore, resulting into NPAs.
- Due to mal-administration by the corporates .
- Due to misgovernance and wrong polices which can disturb the speed of projects. Therefore loans becomes Non-performing Asset.
- Severe competition in any particular market segment.
- Delay in land acquisition due to social, political, cultural and environmental reasons.
- Due to Natural calamities.
- Cheap import due to dumping leads to business loss of domestic companies.
What is the impact of NPAs?
Following are the impacts:
- A general fall in profit margin of lender.
- Non-performing in banking sector causes less money available to fund other projects. Therefore, negative impact on the larger national economy.
- Higher rate of interest charged by bank to increase profit margin.
- Shifting funds from good project to bad one.
- Investments gets stuck, these results into unemployment.
- Investors do not good returns.
- Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
How serious is India’s NPA issue?
Following are the issues:
- More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India.
- Roughly 10% of loans converted into Non-performing Assets.
- This means nearly 10% of loans are unpaid, resulting in substantial loss of money to the banks.
- 15-20% of total loans are Non-performing assets if restructured and unrecognized assets added.
- NPA crisis in India is getting worse.
- Restructuring norms are misused.
- Also, the NPA problem in India is worst when comparing other emerging economies in Brazil, Russia, India, China, and also South Africa.