In our several other blogs, we’ve talked about several aspects of non-performing assets, their types, ways to prevent and reduce them etc. However, with this new post, we’re going to sum up the things we’ve been discussing in the past. This means, with this article you’ll understand NPAs in-and-out – all at a single place… So, let us begin!
The word “NPA” has been much in the news all the time lately and has been raising eyebrows all over. With incidents of back-to-back scams like that of Kingfisher Airlines and The PNB Scam where defaulters fled without paying huge loans, the rise in NPAs has become too apparent. At such an increasing pace, Indian banks may land into bankruptcy resulting into a serious economic concern.
Have a look at this latest trend in the rise of NPAs over the period.
Non-Performing Assets – DEFINITION
A loan (and even a leased asset) that is not paid on or after the due date, and stops generating income for the lending bank is called a Non-Performing Asset (or NPA). In general, any loan instalment or EMIs that remain overdue for a period of 90 days or more are put into NPA category.
Classification of NPAs
The non-performing assets are broadly classified into three categories namely:
- Sub-standard Assets- when a loan continues to be unpaid and remains an NPA for a period of up to 12 months.
- Doubtful Assets- when an asset has remained in the sub-standard category and remains an NPA for more than 12 months.
- Loss Assets- when the loss has been incurred and the amount has not been written off in half or full.
Why NPAs occur?
Non-performing Assets (NPAs) are widely known as defaults or bad loans. Behind these defaults are causes that result in their increase in the numbers.
i. Bad Lending Practices
When loans are given away by banks without doing a thorough background check of borrowers for their repaying capacity, financial health and intent to repay etc.
When banks compete among themselves and as a result disburse unsecured loans.
iii. Incremental Component
When the internal bank management is affected such as the terms of credit, credit policy etc.
When the revenues and profits are observed lower than the average rate.
v. Overhang Components
When NPAs are an outcome of environmental factors like when the agricultural loans are not repaid due to the slow crop yield or lack of natural facts like rain, water, sunlight etc.
Impact of NPAs
Not just the books of accounts in a bank, NPAs impact a lot more than we think of. Check out the impact of NPAs in detail.
- Depositors get lower returns on their investments and may also lose any uninsured deposits.
- Borrowers have to pay a higher rate of interests on the loans to compensate bad loans.
- Reputation of the bank’s shareholders is negatively affected.
- Increased failure due to bad investments and redirection of funds from good to bad projects.
- Liquidity of banks is influenced.
Ways to Reduce NPAs
It is high time financial institutions must take some serious steps to control the unstoppable rise in the number of NPAs. Unless strict ways to reduce NPA are introduced, they will keep piling up and will be an alarming economic concern.
1. SARFAESI ACT, 2002
The SARFAESI empowers banks to deal with NPAs, without the involvement of court, through three alternatives:
- Asset Reconstruction
- Enforcement of Security
Any outstanding amount of more than ₹1 lakh can be dealt under SARFAESI. However, an amount that is less than 20% or principal and the interest amount is not considered under the Act. The Act also allows banks to:
- To release a notice to borrower (and their guarantor) asking them to release the payment within 60 days from the receipt of notice.
- To release notice to anyone who acquires the borrower’s secured assets to produce the same to the bank.
- To advice any of the borrower’s debtors to pay off the loan due with the bank.
In case of failure from the borrower’s end with respect to the issue notice, the bank may:
- Take possession of the secured assets of the borrower
- Sell or lease the security
- Manage the borrower’s security or appoint someone to manage the same.
2. Debt Recovery Tribunals
Brought into being existence in year 1993 by the Indian Parliament, the Act allows financial institutions to speedily recover dues of ₹10 lakhs and above. DRTs are capable of handling larger number of cases as compared to regular courts by cutting down delays in the initial proceedings.
3. Lok Adalats
Small loans of ₹5 lakhs and less can be recovered through the Lok Adalats as per the guidelines issued by RBI in year 2001. This alternative for dispute redressal mechanism covers both suit and non-suit filed cases.
4. Compromise Settlement
This scheme helps in recovery of NPAs up to ₹10 crores through a simplified non-discretionary mechanism.
5. Credit Information Bureau
Third party agencies such as CIBIL helps banks with data on the financial health of the borrower. The Credit Information Bureau maintains records of individual defaulters and shares it with the respective banks to aid them in making effective lending decisions. For this, banks may be charged a fee.
Government of India is trying hard to rescue the banks, particularly looking at the downfall of PSBs in the country. Recently, the centre had announced recapitalisation of PSBs with ₹2.11 lakh crores. However, there is still a strong need felt for stricter laws in NPA management. Wilful defaulters particularly must be treated under a separate, dedicated Act. Moreover, there must be rigorous practices adopted to take correct decisions for granting loans to individual borrowers or companies.