This articles talks about Non-Performing Assets. Nevertheless the brief meaning, types and causes of Non-Performing Assets has thus explained.
Meaning of Non-Performing Asset
Non-Performing Assets (NPA) is defined as a loan asset. Non-Performing Assets has ceased to generate any income for bank whether in form of interest or principal repayment.
This means when the borrower stops paying interest or principal on a loan, the lender will lose money. Such a loan thus known as Non-Performing Asset (NPA). Indian Banking industry is seriously affected by Non-Performing Assets.
What is Non-performing Assets?
• Assets of the banks which don’t perform (that is – don’t bring any return) are called Non-Performing Assets 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.
• 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.
Types of non-performing assets
The following points highlight the top seven types of non-performing assets.
1. Term Loans
A term loan facility will be treated as Non-Performing Assets for the year ending 31st March, 1998 and onward if interest or installment of principal remains past due for a period of more than 90 day.
2. Cash Credit and Overdrafts
Cash credit and overdraft account however treated as Non-Performing Assets. If account remains out of order for period more than 90days.
An account is treated as ‘out of order’ any of the following conditions is fulfilled:-
(a) The outstanding balance remains continuously in excess of the sanctions limit/during power.
(b) Though the outstanding balance is less than the sanctioned limit/drawing power
(i) there are no credits continuously for more than 90 days as on the date of balance sheet; or
(ii) credits during aforesaid period are not enough to cover interest debited during same period more than 90 days.
(c) Further any amount due to bank under any credit facility overdue if not paid on due date fixed by bank.
3. Agricultural Advances:
With effect from September 30, 2004, Advances granted for agriculture purposes become Non-Performing Assets if interest and / or installment of principal remains overdue for two crop seasons in case of short duration crops and a loan granted for long duration crops will be treated as Non-Performing Assets, if the installment of principal or interest thereon remains overdue for one crop season.
Crops having crop season of more than one year i.e. up to the period of harvesting the crops raised will be termed as ‘long duration’ crops and other crops will be treated as ‘short duration’ crops. These Non-Performing Assets nouns would also be applicable to agricultural term loans.
In respect of other agricultural loans and term loans given to non-agriculturists, identification of Non-Performing Assets would be done on the basis as per non agricultural advances which are, at present, 90 days delinquency norm.
4. Exempted Assets
Certain categories of advances have been exempted from being treated as non-performing for the purpose of income determination and / or provisioning, even though they meet the aforesaid criteria.
Briefly, they are as follows:
(i) Advances secured against term deposits. National Savings Certificates, Vikas Patras, Kisan Vikas Patras and surrender value of life insurance policies.
(ii) Advances guaranteed by Government of India and/or State Governments. This exemption in only for purpose of assets classification and provisioning norms and not for purposes of recognition of income. It means income in respect of the facility will not recognize until its actually received.
Also, in case of state government guarantees, this exemption thus available only where the guarantees have not invoked. The State Government guaranteed accounts which have invoked upon becoming Non-Performing Assets are to treated at par with other advances for purpose of asset classification, income recognition and provisioning norms.
5. Advances under Rehabilitation Packages
Where additional facilities are granted to a unit under rehabilitation packages approved by the Board for Industrial and Financial Reconstruction (BIFR) or by term-lending institutions or the bank (on its own or under consortium arrangement), provision should continue to be made for the dues in respect of existing credit facilities.
As regards the additional facilities, provision need not be made for a period of one year from the date of disbursement in respect of additional facilities sanctioned under rehabilitation packages approved by BIFR/term – lending institution.
Similarly, no provision need to make for a period of one year in respect of additional facilities granted to a sick small-scale industrial unit in accordance with a rehabilitation package/nursing programme drawn up by the bank itself or under a consortium arrangement.
After the period of one year, the bank in consultation with its auditors would take a view whether there is need for making provision in respect of the additional facilities sanctioned.
6. Take-out Finance
In the case of take-out finance, if based on record of recovery, the account is classified by their lending bank as Non-Performing Assets it should make provision for loan losses as per guidelines. The provision should reverse when the account thus taken over by the taking-over institution. On taking over the account, the taking-over institution should make provisions as per the guidelines.
7. Advances Covered by the Guarantees of DICGC/ECGC
In the case of advances guaranteed by Expert Credit Guarantee Corporation (ECGC) or by Deposit Insurance and Credit Guarantee Corporation (DICGC), provision is required to be made only for the balance in excess of the amount guaranteed by these corporations.
In case the bank also holds a security in respect of an advance guaranteed by ECGC/DICGC, the realisable value of the security should thus deducted from the outstanding balance before the ECGC/DICGC guarantee is off-set. Classification of Bank Advances.
The banks have to classify their advances into the following four broad groups:
(i) Standard Assets
Standard assets are those loans which have not defaulted on repayment of principal or payment of interest. These assets do not show signs of any problem and carry no more that normal risk attached to the business. However, banks suppose to make provision for these too but the rates vary from sector to sector. For instance, provision for direct advance to agriculture or small and micro enterprise is 0.25% and for housing loan at teaser rates, it is 2%
(ii) Sub-standard Assets:
Sub-standard assets are those which have been classified as Non-Performing Assets for a period not exceeding 12 months. In such cases, the current net worth of the borrower / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full.
Such assets will have well-defined credit weaknesses that jeopardise the liquidation of the debts and are characterised by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected.
In case of term loans, those where installments of principal are overdue for period exceeding one year should treated as sub-standard.
An asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least two years of satisfactory performance under the renegotiated or rescheduled terms.
However, with such assets there are chances that the lender may get back the full payment. Banks need to create a 25% provision of the total outstanding in their books wherein 15% is made for the total outstanding and additional 10% for the portion for which there is no underlying guarantee.
(iii) Doubtful Debts:
Doubtful debts are those which have remained Non-Performing Assets for a period exceeding 18 months. In case of term loans, those where installments of principal have remained overdue for a period exceeding 18 months should treated as doubtful.
As in case of sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of an advance automatically. Collection or liquidation, of doubtful debts on the basis of currently known facts is highly questionable and improbable.
For such assets, lenders need to make 100% provision for the portion of the loan which hence unsecured. For the secured portion of the loan, if the asset has remained non-performing for up to a year, then 25% considered the required provision, 40% for between one year and three years, and 100% for more than three years.
(iv) Loss Assets:
Loss assets are those where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amounts have not been written off wholly a partly. Such assets are not considered and is of such little values that their continuance as bank assets in not warranted although there may be some salvage or recovery values.
The above classification thus only meant for purpose of computing amount of provision however made in respect of advances. As far as the balance sheet presentation is concerned, it is governed by the Third Schedule to Banking Regulation Act, 1949 which requires classification of advances altogether differently.
However, assets should written off from books of lender or else a provision of 100% should made for them.
Types Of Assets
(a) Standard Assets:
Assets which are generating regular income to the bank. If the borrower regularly pays his dues regularly and on time; bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.
(b) Sub-standard Assets:
All those assets (loans and advances) which therefore considered as non-performing for a period of more than 90 days but less than 12 months hence called as Sub-Standard assets. ( Special Mention Account : It includes those assets (loans and advances) which are due for a period of 90 days. “Till 90 days = Special Mention Account and Till 12 Months it becomes Sub-Standard Assets”)
(c) Doubtful Assets:
An asset which is overdue for a period of more than 12 months.
(d) Loss Assets:
Assets which are doubtful and considered as non-recoverable by bank, internal or external auditor or central bank inspectors.
Causes of Non-Performing Assets
Non-Performing Asset arises due to a number of factors or causes like:-
- Speculation : Investing in high risk assets to earn high income.
- Default : Willful default by the borrowers.
- Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.
- Diversion of funds : Most of the funds thus diverted for unnecessary expansion and diversion of business.
- Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
- External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.