2. Non Performing Asset (NPA)
Non per forming asset shall be an advance where:
* Interest and /or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,
* The account remains 'out of order' for a period of more than 180 days,
in respect of an overdraft/ cash Credit(OD/CC),
* The bill remains overdue for a period of more than 180 days in the
case of bills purchased and discounted,
* Interest and/ or installment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years in the
case of an advance granted for agricultural purpose, and
* Any amount to be received remains overdue for a period of more than
180 days in respect of other accounts.
4. Types of NPA
a) Gross NPA:
The sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of
the loans made by banks. It consists of all the nonstandard assets like
as sub-standard, doubtful, and loss assets. It can be calculated with the
help of following ratio:
GROSS NPA = GROSS NPA/ GROSS ADVANCE
b) Net NPA:
Those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. In India,
bank's balance sheets contain a huge amount of NPAs and the process
of recovery and write off of loans is very time consuming, the provisions
the banks have to make against the NPAs according to the central bank
guidelines, are quite significant. That is why the difference between
gross and net NPA is quite high. It can be calculated by following:
NET NPA=(GROSS NPA-PROVISION)/(GROSS ADVANCE –
PROVISION) X 100
5. Reasons for an account becoming
1) Internal Factors:
Funds borrowed for a particular purpose but not use for the said
Project not completed in time.
Poor recovery of receivables.
Excess capacities created on non-economic costs.
In-ability of the corporate to raise capital through the issue of equity
or other debt instrument from capital markets.
Diversion of funds for expansionmodernizationsetting up new
projects helping or promoting sister concerns.
Willful defaults, siphoning of funds, fraud, disputes, management
disputes, misappropriation etc.
Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-ups, delaying settlement of payments
subsidiaries by government bodies etc.,
6. 2) External Factors:
Sluggish Legal System i.e. long legal tangles, changes that
had taken place in labour laws & lack of sincere effort.
Scarcity of raw material, power and other resources.
Shortage of raw material, raw material / input price
escalation, power shortage, industrial recession, excess
capacity, natural calamities like floods, accidents.
Failures, nonpayment over dues in other countries,
recession in other countries, externalization problems,
adverse exchange rates etc.
Government policies like excise duty changes, Import duty
7. Reasons for Occurrence of
These loans can occur due to the following reasons:
Normal banking operations
Bad lending practices
Incremental component (due to internal bank
management, like credit policy, terms of credit, etc...)
Competition banks are enormously selling unsecured
8. Impact of NPA:
Involvement of Management
* Non-payment of the very first installment in case of
* Bouncing of cheques due to insufficient balance in
* Irregularity in installment.
* Irregularity of operations in the accounts.
* Unpaid overdue bills
* Declining Current Ratio.
* Payment which does not cover the interest and
principal amount of that installment.
* While monitoring the accounts it is found that
partial amount is diverted to sister concern or parent
Change in government plans
Death of borrowers
Competition in the market
* Use for personal comfort, stocks and shares
* Avoidance of contact with bank.
* Problem between partners.
Operational and Physical:
* If information is received that the borrower
has either initiated the process of winding up
or are not doing the business.
* Overdue receivables.
* Stock statement not submitted on time.
* External non-controllable factor like natural
calamities in the city where borrower conduct
* Nonpayment of wages.
10. How to reduce NPA?
Some steps are as follows by which bank can reduce NPA -
1. SARFAESI ACT 2002 - The Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI) empowers Banks /
Financial Institutions to recover their non-performing assets
without the intervention of the Court.
2. Lok Adalats: Lok Adalat is for the recovery of small loans.
According to RBI guidelines issued in 2001, they cover NPA up
to Rs. 5 lakhs, both suit filed and non-suit filed are covered.
3. Compromise Settlement: It is a scheme which provides a
simple mechanism for recovery of NPA. It is applied to advances
below Rs. 10 Crores.
4. Credit Information Bureau: A Credit Information Bureau help
banks by maintaining a data of an individual defaulter and
provides this information to all banks so that they may avoid
lending to him/her.
5. Debt Recovery Tribunals: The debt recovery tribunal act was
passed by Indian Parliament in 1993 with the objective of
facilitating the banks and financial institutions for speedy
11. Preventive Measurement for
Early Recognition of the Problem
Identifying Borrowers with genuine intent.
Timeliness & Adequacy of response
Focus on Cash flows