Understanding Non-Performing Assets in Banking
Non-Performing Assets (NPA)
Assets: Generate revenue for the future. Example – Car, Machines, etc.
NPA: An asset becomes non-performing when it ceases to generate income for the bank. NPAs are those loans that have stopped making interest or principal return for over 90 days (3 months).
Classification of NPA
- Sub-standard Asset: A non-performing asset that is overdue for less than or equal to 12 months.
- Doubtful Assets: An asset that has remained NPA for more than 12 months.
- Loss Assets: An asset that remains a non-performing asset for more than 3 years. This occurs when a bank faces total loss as it cannot recover the asset.
Asset Classification
- Standard Assets: The accounts which are paid regularly with interest and instalments are active or standard assets. They are the best assets, so there will be no question of turning such accounts into NPA.
- Sub-standard assets
- Doubtful assets
- Loss assets
Causes of Asset Sickness Leading to NPA
1. Sickness in Industries
Industrial borrowers usually repay their interest and instalments in time in the beginning, but with the passage of time, due to internal and external reasons, the internal monetary system of the industrial unit is disrupted. Internal reasons include causes like defective production methods, inferior quality of produced goods, etc.
2. Defective Evaluation of Project
Borrowers have to apply for credit for their projects. These projects are studied carefully by evaluation officers, but sometimes due to a lack of proper knowledge, the evaluation officer overvalues the project, and loans are sanctioned which they do not deserve.
3. Lack of Proper Documents
According to the banking act, borrowers have to produce all necessary documents, but very often, bank officers release loans even before all documents are supplied to the banks. The borrowers misuse the money and fail to repay the instalment.
4. Political Interference
Sometimes the borrowers are not eligible for credit, but due to political pressure and interference, bank officers have to sanction the loans. Such money is misused, and the borrowers do not repay the instalments with interest.
5. Infrastructural Defects
Sometimes projects are sanctioned loans, but due to a lack of proper infrastructure, the projects do not function well. It is necessary for a project to get necessary supply of power, raw material, fuel, transport, market, technical know-how, etc.
6. Neglect of Guideline for Security of Finance
Banks must observe the role of security and safety of money lent. The soundness of banks depends on the secured return of finance. If the banks are tempted unduly by profit-making, they may ignore the guidelines of security of finance.
7. Acceptance of Weak Securities for Loan
Banks require securities for loans, but these securities must be sound. They must not be overvalued. The securities pledged must be liquid to the extent that banks can recover dues by selling them in the open market.
8. Inefficiency of Statutory Provisions
In our country, NPA is increasing because defaulters are not punished severely. There is a lack of strict statutory provisions so that borrowers dare not turn into defaulters. The laws are full of loopholes, and the process of legal proceedings is slow.
9. Social Responsibility of Personalized Banks
In India, personalized banks have to perform social obligations by helping the rural and worker sections of the society. 40% of credit lending has been reserved for such purposes.
10. Lack of Conscious Efforts for Collection
In fact, all accounts start as certified assets and are paid with regular instalments and interest, but by and by, irregularity starts.