Non-Performing Asset

What is a Non-Performing Asset?

A Non-Performing Asset (NPA) is a loan or advance that remains unpaid for 90 days or longer. This is the bank’s equivalent of ‘what good is money, if it’s not on time’.  

This situation indicates a borrower’s failure to meet their financial obligations, which can negatively impact the lender's financial stability. NPAs are crucial for assessing the credit quality and risk exposure of a financial institution.

What are the causes of non-performing assets? 

Non-Performing Assets can arise due to several factors, including: 

• Economic downturns affecting borrowers' ability to repay. 
• Poor credit appraisal by lenders. 
• Mismanagement of borrowed funds by businesses. 
• Unforeseen natural disasters or crises impacting income streams. 

What are the three categories of NPA? 

RBI categorizes NPAs based on the timeframe of delinquency: 

• Substandard Assets: These are loans where repayment is overdue for a period of less than 12 months. 
• Doubtful Assets: Loans are categorized as doubtful when repayment becomes uncertain after being overdue for 12-18 months. 
• Loss Assets: Loans classified as a complete loss with little to no prospect of recovery after being overdue for more than 18 months. 

5 key terms related to NPA 

• Provisioning: Banks set aside funds to cover potential losses arising from NPAs. 
• Gross NPA Ratio: The total value of NPAs as a percentage of total outstanding loans. 
• Net NPA Ratio: Gross NPA minus provisions for bad debts, expressed as a percentage of total advances. 
• Write-off: Removing a loan from the bank's books after it is deemed unrecoverable. 
• Recovery Rate: The percentage of NPA recovered over a specific period. 

How is NPA calculated? 

The Gross NPA Ratio is a key metric used to assess the health of a bank's loan portfolio. It is calculated as: 

Gross NPA Ratio = (Total Value of NPAs) / (Total Outstanding Loans) x 100 

How to manage non-performing assets?  

Banks employ various strategies to manage NPAs: 

• Restructuring: Modifying loan terms to make repayment easier for the borrower.
• Recovery: Aggressive recovery efforts, including legal action. 
• Provisioning: Allocating funds to cover expected losses from NPAs. 
• Regular Monitoring: Continuously tracking loans to prevent them from becoming NPAs. 
• Selling Distressed Assets: Selling off NPA loans to specialized asset reconstruction companies. 

What is the 5 25 rule in NPA? 

The 5/25 rule is a restructuring guideline for NPAs by the RBI; particularly for long-term infrastructure and core sector loans. It allows banks to refinance these loans every five years, within a 25-year repayment period. This rule helps ease the burden on borrowers and improves the overall quality of bank assets.

Being aware of NPAs helps you make informed decisions, whether as a borrower or investor. For better financial management, consider using a credit card that supports responsible spending. Our 811 Credit Card offers features designed to build credit and manage finances effectively, helping you maintain financial health.