NPA or Non Performing Asset is those kinds of loans or advances that are in default or in arrears. In other words, these are those kinds of loans wherein principal or interest amounts are late or have not been paid. These are also the kinds of loans where the lender considers the loan agreement to be broken and the receiver of the loan is unable to pay back the loan amount.
In simpler terms, if the customers do not repay principal amount and interest for a certain period of time, then such loans are considered as Non Performing Assets or NPA. To put it in other words, Non Performing Assets are basically Non Performing Loans. In our country, the timeline given for classifying the asset as NPA is 180 days. As against 45 to 90 days of international norms.
NPAs are of 4 types:
- Standard Assets: It is a kind of performing asset which creates continuous income and repayments as and when they become due. These assets carry a normal risk and are not NPA in the real sense of the word. Hence, no special provisions are required for standard assets.
- Sub-Standard Assets: Loans and advances which are non-performing assets for a period of 12 months, fall under the category of Sub-Standard Assets.
- Doubtful Assets: The Assets considered as non-performing for a period of more than 12 months are known as Doubtful Assets.
- Loss Assets: All those assets which cannot be recovered by the lending institutions are known as Loss Assets.
NPAs are mostly detected by the auditors or RBI.
When loans and advances are not repaid within the stipulated timeline, it creates adverse effects on a bank’s balance sheet. NPAs create financial burden on the lender. For instance, a substantial number of NPAs over a period of time reflect that the financial health of the bank is in bad shape. Phased with NPAs, the lenders have options to recover their losses that includes taking possession of any collateral or selling off the loan at a significant discount to a collection agency.