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.
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.
What are the various steps taken to handle Non-Performing Assets in India ?
Nno-performing Assets not new to Indian banks and various steps taken by government of India on legal, financial, and also policy level reforms. In the year 1991, Narsimham committee recommended many reforms to tackle NPAs. Following are some of the solutions:
1. The Debt Recovery Tribunals (DRTs) – 1993
The Debt Recovery Tribunals formed to decrease the time required for settling cases. Tribunals governed by Recovery of Debt Due to Banks and Financial Institutions Act, 1993. However, number of tribunals are not sufficient. Therefore, they also suffer from time lag and cases are pending for more than 2-3 years in many areas.
2. Credit Information Bureau – 2000
Credit Information Bureau helps in providing good information to bank. This helps to prevent loan falling into bad hands and therefore prevention of NPAs. It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.
3. Lok Adalats – 2001
Lok Adalats helps in tackling and recovery of small loans. However, limited up to 5 lakh rupees only by the RBI guidelines issued in 2001. It is positive in sense that it avoids more cases in legal system.
4.Compromise Settlement – 2001
Compromise Settlement provides a simple mechanism to recover Non-Performing Asset for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and fraud cases are excluded.
5. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002:
The Act permits Banks and also Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:
- Take ownership of security
- Control over the management for borrowing concern.
- Appoint a person to manage borrowing
6.Corporate Debt Restructuring – 2005
Corporate Debt Restructuring helps in reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.
Insolvency and Bankruptcy Code 2016 encourages entrepreneurship, availability of credit, and balance the interests of all stakeholders. It consolidate and amends law relating to reorganization and also insolvency of company. This solves the issue of Non-Performing Assets.