What are Non-Performing Assets or NPA?

Non-Performing Assets or NPA

Non-performing assets or NPA are the loans provided by the banks to retail or institutional clients which are no more performing up to the mark or a preset standard. These are basically loans turned bad. It is all form of credit which is extended by a bank or NBFC and is overdue for a specified period of time. To qualify as a Non-Performing Asset it needs to be delinquent for a minimum of 90 days. It is also known as “Non-performing loans”.

Term loans, overdraft/cash credits & all other loans and advances are qualified to be tagged under NPA

Banks would generally classify an asset as Non Performing only if the interest due and charged during a quarter is not serviced fully within 90 days from the end of a quarter.

 

Example of NPA

When a loan is provided to a client by the bank it is a financial instrument through which the bank will earn income (till the tenure of the loan) in form of “interest income”. This is then seen as an asset that will generate income and is shown on the asset side of a balance sheet, however, the interest income earned in every period will be shown on the income side of a Profit and Loss Account.

Once this asset becomes overdue for a minimum of 90 days or as otherwise specified it is considered non-performing and it discontinues generating any income for the bank, hence it now potentially acts as a liability for the bank.

Related Topic – What are Fixed Assets?

 

Main Causes of NPA – Non-Performing Assets

There are several reasons for assets turning bad, a few of them are:

  • Economic Instability – A region’s economy could be hit by several reasons beginning from inflation to environmental issues. If the macroeconomy is in trouble chances are that loans all over will be affected.
  • Improper Risk Mitigation by Banks – This can also be categorized as low standard lending by banks and NBFCs where credit is extended to a client just on the base of speculation or any related reason.
  • Diversion of funds – Funds used for purposes other than stated in the loan documents are called diversion of funds, due to their ill-intent, it is difficult to recover money from these types of borrowers.
  • Bank Operating Style – Sometimes the way a bank operates also adds up to NPA such as reasons related to the credit policy, terms of credit etc.

 

Short Quiz for Self-Evaluation

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