NPA

NPA or Non Performing Asset is those kinds of loans or advances that are in default or in arrears. In other words, these are those kinds of loans wherein principal or interest amounts are late or have not been paid. These are also the kinds of loans where the lender considers the loan agreement to be broken and the receiver of the loan is unable to pay back the loan amount.

In simpler terms, if the customers do not repay principal amount and interest for a certain period of time, then such loans are considered as Non Performing Assets or NPA. To put it in other words, Non Performing Assets are basically Non Performing Loans. In our country, the timeline given for classifying the asset as NPA is 180 days. As against 45 to 90 days of international norms.

NPAs are of 4 types

1. Standard Assets

It is a kind of performing asset which creates continuous income and repayments as and when they become due. These assets carry a normal risk and are not NPA in the real sense of the word. Hence, no special provisions are required for standard assets.

2. Sub-Standard Assets

Loans and advances which are non-performing assets for a period of 12 months, fall under the category of Sub-Standard Assets.

3. Doubtful Assets

The Assets considered as non-performing for a period of more than 12 months are known as Doubtful Assets.

4. Loss Assets

All those assets which cannot be recovered by the lending institutions are known as Loss Assets.

NPAs are mostly detected by the auditors or RBI

When loans and advances are not repaid within the stipulated timeline, it creates adverse effects on a bank’s balance sheet. NPAs create financial burden on the lender. For instance, a substantial number of NPAs over a period of time reflect that the financial health of the bank is in bad shape. Phased with NPAs, the lenders have options to recover their losses that includes taking possession of any collateral or selling off the loan at a significant discount to a collection agency.

Causes for rising NON-PERFORMING ASSETS in INDIA

The banking sector is the pillar for the economy. Through the banking sector, only the country can check the accountability which likely to cause hinder of the economy. To reduce the non-performing assets bank must work efficiently and must have the reasons to forecast the reasons to cause the non-performing assets on bad loans. The problems for rising of non-performing divided into three categories, first Is on the initial performance of internal banking, second the causes arise from the accountability of borrowers were on the borrowers tend to consider as the main cause for the rise of NPA, third other causes which happens outside the circumstances of the banking system.

1. Causes Responsible to Banks

The Reserve bank of India has said that poor credit appraisal skills to lenders have resulted in a high level of stress over resulting in bad loans over the last five years. One of the major hinders the non-performing assets management of bank which is inadequate credit appraisal capacities were the banks that know the only consulting firm and a few other desks in the selective bank.

A loan may be bad because of the selection of wrong borrowers. The lender may not have the full and true disclose material facts about the borrower since the data which is not systematically distributed by the financial system. That’s why the potential borrower has more information than other to exploit the lender with less information. The borrowers tend to give misleading information to the lender which make even worse to take a decision by the lender. So, the challenge faced by the bank is on choosing the right borrower. In that situation, the bank needs to reject the wrong borrower through better investigation. At the same time, honest borrowers must be distinguished from the wrong borrowers. Such borrower engages in high risk of activities which turn the loan into default loan causing problems to the bank.

Moreover, the management does not have enough capacity on its lending facilities.

2. Causes Responsible to Borrower

Longer gestation time is held between the transaction with the bank, were the bank according to its transaction the importance is not equally distributed and hence there is a lack of management in banks over borrowers. Apart from that the diversion of funds to unrelated business or fraud lapses in initial borrowers due to the due diligence and inefficiencies in the monitoring process for the reasons of bad loans in the bank. And there is an inadequate research and development over the borrower.

3. Other Causes

Political warfare comes to the picture were in the present mode government that which made a discussion in parliament that non-performing assets have gone up to 10lakh crore Indian rupee till March 2018 and its now 12lakh crore Indian rupee. About 9.57 lakh crore non-performing were on Modi government. Through many criticisms made by politician and activists over the government that put the bank in the insecure situation. And many parliamentary debates were going to reduce and regulations to control the non-performing assets. The RBI direction on referring companies to the national company law tribunal could push the non-performing assets to clean up the process to end its game, this process has been already initiated for few cases. An estimated more than 70%of cases to be restructured in upcoming periods.

Impact of NPA on Banks

1. Liquidity Position

 If the bank evaluates less capital the future business concern, which affects the position of banks and creating a mismatch between the assets and liability and they force the bank to raise the resources at a high rate. So, there will be an impact on the profitability of banks, were they not able to recover the amount from the borrower the level of profits will come down.

2. Undermine Bank’s Image

Increase in non-performing assets which shadows the domestic markets and global level markets, on that situation the bank profitability decreases which lead to the bad image to banks.

3. Effect on Funding

Increase in non-performing assets leads to scarcity in funding to other borrowers. As well as the Indian capital market also get affected. And then there will be only a few banking institutions lend money.

4. Higher Cost of Capital

It shall result in increasing the cost of capital as banks will now have to keep aside more funds for smooth operations.

5. High Risk

High on non-performing assets, low profitability, high risk in business and work against the bank and may take the two circumstances survival of the bank. And it affects the risk-bearing capacity of the bank.

6. Bank Profitability

The which makes low profits have lower capital adequacy ratio and the low capital ratio which limits the further creation of assets. Such kind of banks face difficulties in their growth, expansion, and plans and there they need not wherewithal to march boldly on these fronts. In these growth failures in the expansion, the only consequences and stagnation and negative growth.

They reduce net interest income as they do not charge the interest to these accounts.

Servicing non-performing assets need to be prudentially provided for. This will again lead to reduced profitability.

Suggestion to NPA in Banks

1. Debt recovery tribunals

According to Narasimhan committee report (1991) suggested setting up tribunals to reduce set up for cases. There are only 22 debt recovery tribunals and debt recovery appellate tribunals not sufficient to solve problems. So, setting up more tribunals will the solution to reduce the problems of NPA to banks.

2. Securitization Act 2002

Securitization and reconstruction Act 2002. In this act enables the bank to issue notice for defaulters for the recovery of money within 60 days. The notice contains that the property will not sell or dispose of without the consent of the lender. The securitization Act empowers more powers to the bank to take over the possession of the assets of the management of the company. The lenders can recover the property after the debt amount is recovered by the bank and the property can be discharged by the lender. And enables to acquire the non-performing According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores have been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.

3. Lok Adalats

Lok adalats is the best way to recover the loans. According to the RBI guidelines issues in 2001 were they cover up NPA about 5laks rupees, the suit filed and non-filed will be covered.

4. Compromise settlements

It is the simplest way to recover non-performing assets. The compromise settlements scheme will applicable advances under 10crore rupees. It covers the cases which are filed and pending in debt tribunal tribunals and debt recovery appellate tribunal. Cases which obtained by fraud and wilful distress will be excluded.

5. Credit information bureau

The information is necessary to prevent turning from loans to non-performing assets. If there is a defaulter in one bank and the information about the defaulter should be delivered to all banks. So, that the bad loans can be set aside. The credit information bureau can help to maintain the record which can be assessed by other financial institutions.

6. Corporate governance

A consultative group has been set up by Dr. A.S. Ganguly by the reserve bank to review all the banks and financial institution and obtain compliance, transparency, and records and making regarding recommendations for the board of directors with a view to minimizing the risks. The group is now finalizing the guidelines and supervise the effective control on boards over non-performing assets.