NPA or non-performing asset is a credit facility when the person incurs a loss where the interest or installment of principal or both remains due over certain tenure. An asset is a non-performing one when the borrower of the asset fails to pay the undue amount to the lender. Basically, if a person or a business takes a loan and is unable to pay the money it can be said as a non-performing asset.
To ensure transparency it has been decided to adopt a grace period of 90 days since March 31st, 2004.
If a non-performing asset is a loan or an advance will be fixed if anyone takes place:
- Interest or installment of principal will remain overdue if it exceeds 90 days in case of the term loan.
- The amount which is to be received remains a due if it exceeds 180 days in case of consumer loans.
- If it is an Overdraft, Cash Credit, Pre-shipment Credit in Foreign Currency or Export Packing Credit, the account will be out of order or inactive if it exceeds 90 days.
- The bill is due if it exceeds 90 days in case of purchased or discounted bills.
- Submission of stock statements remains pending for three regular quarters in case of Cash Credit Facility.
- Any amount that is to be received remains due if it exceeds 90 days in case of other accounts.
- The loan or advance for agricultural purpose or installment of principal or interest or both remains due for two seasons of harvest but not for consecutive two years.
Classification of the non-performing asset on the basis of its period and recoverability:
- Sub-standard assets: when a non-performing asset exceeds a period not more than 12 months it is termed as a sub-standard asset. Here the bank has to take 15% of its reserves.
- Doubtful assets: these assets are termed as doubtful assets when it exceeds a period of 12 months.
- Loss assets: a non-performing asset which has already incurred a loss where this loss has been identified by the bank, internal or external auditors, central bank inspectors. All those loss assets cannot be recovered.
In general, after a given notice and a given tenure, the bank will either try to recover the repay amount or seize the property that was used for taking the loan.
Estimated Extent of Non-Performing Assets:
Gross percentage of NPA jumped to 4.2% of the total overdue amount by the end of September 2013 from 3.6% as stated by Reserve Bank of India. As the recent warning was given that the bad loans could be higher up to 7% in recent coming years. The estimated NPA will be up to 2.50 lakh crores by the end of March which is almost equal to the total budget of Uttar Pradesh.
The NPA curve as per news report is given as:
The NPAs are about to rise at a higher rate in the next coming years.
Effects of NPA on our economy
The higher rates of NPA can lead to the following impacts on our economy:
- There will be a scarcity of funds in the Indian security markets as due to this increasing NPA very few banks will be willing to give a loan if they are not sure of the recovery of the due amount.
- The shareholders will find it difficult to continue its process as they will lose money where the banks will find it tough to survive.
- There will be a hike of interest rate due to the lack of confidence in the banking sectors which will, in turn, affect the investors who are willing to take loans for their projects.
- The retail customers will also have a tough time paying a higher rate of interest for the loan.
- The NPA will lead to a higher cost of capital, higher inflation, therefore, lower growth which will directly affect the Indian economy due to low take off funds.
- The estimated extent of NPA is equal to the size of the UP budget and if these amounts are recovered it will be very beneficial for the growth of Indian economy.
There are various reasons why NPAs are growing exponentially which includes some corporate as well as other reasons too. This is one the major awareness as of now which the aspiring candidates should know in order to crack the bank exam. The section of general awareness plays a vital role in the sectional cut-off of the candidate. This trending topic consists of many questions that are put in the banking awareness section of every banking exams.
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