When an individual fails to repay or return the money borrowed from a lender, then such kind of a loan becomes nonperforming in the books of financial institutions. There is no guarantee whether a lender can receive the money lent to the borrower.
Non Performing Asset
What is Non-Performing Asset?
A Non Performing Asset commonly known as NPA refers to the classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. It is those assets of the banks which do not bring any return.
In most of the cases, debt is classified as nonperforming when an individual does not pay loan which he/she has taken for more than 90 days. 90 days of nonpayment is the standard period of debt to be categorized as nonperforming.
Types of Non Performing Assets
- Standard Assets: A Standard asset is one in which the borrower fails to make repayment regularly and on time.
- Sub-Standard Assets: A Sub-Standard asset is one which has been NPA for a period not exceeding 12 months. It is an asset in which bank has to maintain 15% of its reserves.
- Doubtful Assets: A Doubtful asset is one which has been NPA for more than 12 months.
- Loss Assets: A Loss asset is one where the loss has been identified by the bank, through the internal or external auditor or by the central bank inspectors. The amount has not been written off, wholly or partly.
Causes of NPAs
- Willful Defaults: A willful defaulter is a person who has defaulted in meeting its payments/repayment obligation to the lender even when it can honor the said obligations. One of the best examples for willful defaults is Kingfisher Airlines Ltd.
- Industrial Crisis: It is one of the external factor affecting NPAs in the country. Industries depend on banks to fulfill their requirements on funding their projects. In case of a crisis in the industry, it will change the banking sector, and NPA will rise.
- Lenient Lending Norms: Lenient norms by the lender is also one of the prime reasons for rising NPAs. Over analysis of financial status and credit rating by banks for industry-barons are one of the reasons.
- Credit distribution Mis-management: Misuse of funds by the borrowers also lead to NPA's. Some borrowers bribe the bank officials and get the loan approved with a sole intention of default.
Scenario in India
Public Sector Banks in India are worst affected with NPA compared with the private sector counterparts. Among the major public sector banks, State Bank of India has the highest amount of NPA at over INR 1.86 lakh crore followed by Punjab National Bank, Bank of India, Bank of Baroda, Canara Bank and Union Bank of India.
Among the private sector banks in India, ICICI Bank has the highest amount of NPAs followed by Axis Bank, HDFC Bank, and Jammu & Kashmir Bank, respectively.
Effective measures should be taken by the banks and financial institutions to reduce the effects of NPA which dampens the economic growth of banks by poor recycling of funds, which in turn will severely affect the deployment of credit as well as the soundness of the bank.