Non Performing Asset: Substandard, Doubtful, Loss Assets

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An asset becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal has remained ‘past due’ for a specified period of time.

Non-Performing Asset

What is an asset for Bank?

The important assets of banks are:

  • Cash in hand
  • Investments
  • Loans and Advances

The NPA deals with loans and Advances.

Criteria for Non Performing asset

A non-performing asset (NPA) is a loan or an advance where:

  • Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan
  • The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC). An OD/CC account is be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. In cases where the outstanding balance in the principal operating account is less than 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, these accounts should be treated as ‘out of order’.
  • The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted
  • The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
  • The installment of principal or interest thereon remains overdue for one crop season for long duration crops
  • The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
  • 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.

Gross NPA vs Net NPA

  • Gross NPA refer to all NPAs in a bank’s book even if these are considered irrecoverable
  • Net NPA is obtained after adjusting part payments received and kept in suspense accounts, and total bank provisioning.

Gross Advances vs Net Advances

  • Gross Advance: The total value of loans advanced by Bank is called Gross Advance. It includes both standard as well as advances that turned NPA.
    Gross Advances = Standard Advances + Gross NPA
  • Net Advance: Gross advances less deduction on account of any provisions held in case of NPA accounts is Net Advance.
    Net Advances = Gross Advances – Provisions

Categories of NPA

Banks are required to classify nonperforming assets into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

  • Substandard Assets: A substandard asset is the one which has remained NPA for a period less than or equal to 12 months.
  • Doubtful Assets: An asset is classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

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