When any assets are not able to generate income for banks or any other financial institutions, it falls in the category of NPA(Non-Performing assets). In other words, when any amount is overdue for 90 days and ceases to generate income, it becomes a Non- performing asset.

Example – Suppose a person has taken a loan from the bank and then after he fails to make the payment of interest and the principal amount, that income is not generated profit for the bank. Bank will consider that amount as an NPA.

Reasons for arising of NPA

There are several factors due to which NPA is arising such as recession, lack of credit appraisal, borrowers default etc.

• Recessions – When there is a scarcity of growth in the industry, it may lead to diminished Demand and supply of goods and services, In that case, the cash flow funds get reduced and banks are not able to reimburse their loan amount it’s the most serious factor that leads to the NPA.
• Lack of credit appraisal – Some banks do not follow the proper credit approval at the time of granting the loan, therefore borrowers make the default in making the payment.
• Borrowers default – There are several borrowers who are not paying their loan amount due to a lack of money or making fraud or mismanagement, that money does not make any to the bank, it’s considered an NPA.

NPA is categorised into four parts

• Standard assets
• Substandard assets
• Doubtful assets
• Loss assets

Standard assets

Standard assets are that part of NPAs that have not been paid between 90 days to 12 months.

It is considered the normal risk level that the bank or financial institution can tolerate.

Substandard assets

Sub-standard assets are those assets whose payments have not been made for more than 12 months. It comes under the class of high-risk level, it will also impact the profitability of the bank.

Doubtful assets

Non-performing assets become doubtful debts when it is overdue for more than 18 months. This type of NPA really has a big impact on the profile of the banks. More and more banks are also suspicious whether the borrower will repay the loan amount or not.

Loss assets

It is also a category of NPA in which the bank assumes that the borrower will never pay back the loan amount and the bank will mention/record that amount as a loss in the balance sheet.

How does the NPA work

When the borrower does not reimburse the principal or interest amount, the bank will force the borrower to pay the amount, if the borrower is still not paying the amount, the bank will sell the borrower’s property at a discount and pay off their loan. Will recover the amount.

Suppose a financial institution has taken a loan of 10 million. Now the company is incompetent to reimburse the interest amount of 5000 within three months, the bank will categorise that loan as a non-performing asset and record that loan as a loss amount in the balance sheet. In the second case, if the financial institution has paid the interest amount and does not pay the principal amount, it is also classified as a non-performing asset.

Awareness towards NPA

It is important that both the banks and the borrowers should be aware of the difference between performing and non-performing assets.

As we all know that for the bank, the interest amount is the source of income of the banks. NPA adversely affects the profitability of the banks and the bank becomes insufficient to generate income. Hence the bank should keep a check on its non-performing assets from time to time. Banks should be careful that the principal amount should be less so that the bank can maintain its profitability and stability and generate more income

Borrowers should also be aware of NPA if there is an asset that is non-performing and interest is not being paid on that asset. This will adversely affect the creativity of the borrowers. Apart from this, the borrower will not be able to take money from the bank as a loan.

Word description – Non-performing assets, financial institutions, Bank, income, payments, borrowers.

Name – Shikha Mishra

Course – (BBA LLB 4th year)

University – Banasthali University