There is so much talk on non performing assets or NPAs these days that it has become very important to understand what is a standard and non a standard asset for a bank.
Before understanding standard and non standard assets, you need to understand NPAs
Loans and advances extended by banks comprise their asset base. However, depending on the performance of such loans they are classified as performing or non-performing asset (NPA) assets according to the norms provided by Reserve Bank of India. The classification is aimed to bring about transparency and consistency of a higher degree in the published accounts.
Standard asset for a bank is an asset that is not classified as an NPA. The asset exhibits no problem in the normal course other than the usual business risk. Sub-standard asset is an asset class drawn within the broader and much-known non-performance asset category of banks on the basis of term for which the asset class has not performed and extent of dues realization from collateral security with banks. In general, NPAs are the assets that have ceased to generate income for the banks. Further, on the basis of some other criterion stipulated for different kind of accounts, assets of the bank are classified as NPAs. More specifically, according to RBI circular, sub-standard asset is an asset that has continued to remain an NPA for a period less than or equal to 1 year. With well-specified credit weaknesses, the liquidation of the debt would be difficult and banks would necessarily have to sustain some losses if deficiencies with respect to interest and principal amount payment are not corrected. Another instance where a loan account or an asset class of the bank is categorized as a sub-standard asset is when the terms and conditions pertaining to the loan account are re-negotiated or revised. And depending on the satisfactory performance basis the revised terms, the account has to be classified within the sub-standard asset category for a minimum of 12 months. Thus, mere revision of terms of the account with no proper compliance does not result in the up-gradation of the asset quality. By changing norms of standard and sub standard classification you cannot hope to improve the situation.
RBI keeps changing standard and sub standard asset classification
The Reserve Bank of India also keeps changing the standard and sub standard classification from time to time. What was a standard asset today, can well become a sub standard asset tomorrow. Banks in India in the last few quarters have been increasing their provisions, to guard against turning standard assets into sub standard assets. In fact, the asset quality in the banking sector has deteriorated to the worst levels, with banks like bank of Baroda reporting record losses, thanks to asset quality taking a turn for the worst. The Reserve Bank of India has also asked banks to make extra provisions, thus resulting in fresh slippages and standard assets gradually turning into sub standard ones. Reasons for causes of sub standard assets There are a number of reasons why assets turn sub standard. One of the biggest reasons for the same is the gradual downturn in the economy. In India, the last few years saw huge NPA slippages resulting into standard assets turning into sub standard assets. This is largely because of the huge defaults in the steel and power sector in India. Banks are hoping that there is a gradual recovery and non performing assets over a period of time, get back to normal.
Reasons for causes of sub standard assets
There are a number of reasons why assets turn sub standard. One of the biggest reasons for the same is the gradual downturn in the economy. In India, the last few years saw huge NPA slippages resulting into standard assets turning into sub standard assets. This is largely because of the huge defaults in the steel and power sector in India. There are steps being taken to now take control of sub standard assets, whether that will fructify remains to be seen.
How to make a sub standard asset a standard one?
There is no easy method to convert a sub standard asset to a standard one except to focus on solid recoveries. the banks must have their own internal processes to speed up recovery and set targets to achieve the same. How far and how soon that will happen is difficult to say. In the meantime, India's banking menace of sub standard assets continues.