Non-Performing Assets

Definition - The terms non-performing assets (NPAs) refer to loans that do not meet their stated
principal and interest repayments. In other words, these are assets which do not generate income.

According to the Reserve Bank of India Prudential Norms, ‘an asset, including a leased asset,
becomes non-performing when it ceases to generate income for the bank’

RBI Master Circular (2005) defines A Non-performing asset (NPA) is a loan or an advance
where;

(i) interest and/ or installment of principal remain overdue for a period of more than 90
days in respect of a term loan,
(ii) the account remains ‘out of order’, in respect of an Overdraft/Cash Credit. (According
to the RBI Master circular, an account should be treated as 'out of order' if the
outstanding balance remains continuously in excess of the sanctioned limit/drawing
power but there are no credits continuously for 90 days as on the date of Balance
Sheet or credits are not enough to cover the interest debited during the same period).
(iii) the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
(iv) a loan granted for short duration crops will be treated as NPA, if the installment of
principal or interest thereon remains overdue for two crop seasons.
(v) a loan granted for long duration crops will be treated as NPA, if the installment of
principal or interest thereon remains overdue for one crop season.

The RBI Master Circular, 2014 added the following to aspects to the definition of a NPA

(vi) the amount of liquidity facility remains outstanding for more than 90 days, in respect
of a securitization transaction undertaken in terms of guidelines on securitization
dated February 1, 2006.
(vii) in respect of 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.

Types of NPA

1. Sub Standard Assets would be those, which have remained NPAs for a period less than or
equal to 12 months.
2. Doubtful Assets are those which have remained in the sub-standard category for a period
of 12 months.
 3. Loss Assets are considered uncollectible and of little value that its continuance as a
bankable asset is not warranted and even though there may be some salvage or recovery
value.

NPA Management in Banks

Rising NPAs pose a deep challenge for banks, moving their profitability, asset quality and ability
to extend new loans. Effective NPA management thus evolves vital for banks.

Banks take various steps to control and recover NPAs in their loan portfolio.

The first step is to spot NPAs early and classify them correctly as per RBI policies. Banks then
start following up with defaulting borrowers, getting them and negotiating repayment plans.
They may restructure loans by rescheduling refund periods, easing interest rates or waiving
penalties.

If follow-up efforts do not yield results, banks explore other options like selling NPAs to Asset
Reconstruction Firms specializing in loan resolution.

As a last resort, banks initiate legal action against willful defaulters. They file cases in Debt
Recovery Tribunals and the National Company Law Tribunal under the Insolvency and
Bankruptcy Code for corporate loans.

The RBI and government have taken steps to improve NPA management, including tighter NPA
recognition norms, loan recast schemes, loan sale advisories and interventions under IBC. Yet,
NPAs remain hard due to delayed legal methods, lack of clarity and evergreening of loans.

Effective NPA management requires a comprehensive approach from banks that focuses on early
detection, timely recovery efforts, aggressive legal action, and making internal goods. With
concerted efforts, banks can rein in NPA levels and save their financial health over the long term.

NPA Management

NPA can be managed by the following.

o Early label and sort: Banks must have a vital system to spot NPA accounts at the before.
Any default in payment of principal or interest for 90 days should be faded as an NPA
per RBI norms. Banks should rightly classify NPA accounts as sub-standard, suspect or
loss assets.
o Regular follow-up and monitoring: Banks should regularly follow up with defaulting
borrowers through phone calls, letters, emails and even personal visits. The objective is to
remind borrowers about repayment obligations, know reasons for default and try to work
 out resolution plans. Banks may offer benefits like extending loan tenors, waiving
penalties, etc.
o Loan restructuring: Where viable, banks may restructure NPA loans by rescheduling
repayments, feeding moratoriums, easing interest rates, etc. The goal is to make the loan
tolerable and better banks' cases of full or partial recovery. Yet, frequent restructuring
should be evaded.
o Collateral invocation: Banks can invoke the security (collateral) against NPA loans and
sell the assets to recover funds. Yet, poor collateral valuation and delayed legal methods
for asset sale pose challenges to good collateral request.
o Filing of legal cases: Where efforts to recover NPAs fail, banks must quickly initiate
legal proceedings against willful defaulters. They can file cases in Debt Recovery
Tribunals and the National Company Law Tribunal under the Insolvency and Bankruptcy
Code for the speedy solution of NPAs.
o Provisioning for losses: Banks must make fair provisions for loan losses to account for
likely write-offs against NPAs. This helps reduce the effect of NPAs on banks'
profitability. Provisioning needs are set by the RBI.
o Making internal powers: Banks must better their internal methods, scanning tools, staff
skills and governance forms to better detect, control and resolve NPAs in the long run.
Technology can be key in tracking loans, placing red flags and streamlining processes.

By following these steps in an integrated manner, banks can manage their NPAs more effectively
and minimize losses, although external reforms are also needed to improve the overall NPA
resolution web.