Non Performing Assets - Read the Complete Description

With the crucial points in various banking exams nearing, candidates are in full swing to give their preparation the best of them. Banking domain is a very large and beneficial domain containing multiple information and branches. While preparing for the exams many questions are being tackled by the aspirants. One such question is what actually is Non Performing Assets or NPA as referred in general term. This topic is also termed as one of the favorite topics for the committee conducting the exams. NPA’s do raise many questions in mind of the aspirant but in this blog, we will try to answer all the doubts that may pertain to this topic. You can also give your preparation cutting edge by joining Oliveboard Edge and learning with the experts. Let’s start with the blog.

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Non Performing Assets – Introduction

What is Non Performing Assets (NPA)?

By definition, Non Performing Assets(NPA) is a loan for which the principal amount as well as the interest amount remains overdue for a period of 90 days. While 90 days of nonpayment is the standard, the amount of elapsed time may be shorter or longer depending on the terms and conditions of each loan. The conditions that are kept for the loan to become an NPA are mentioned on the signed agreement at the time of agreement signing.

Classification of NPA

Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Causes of Non Performing Assets

There are utmost 6 ways in which a loan becomes a non performing assets. The names of the following are as follows:

Willful Defaulters:- A wilful defaulter is the one who has defaulted in meeting the agreed-upon limitations, although he is capable of honoring the agreed-upon limitations.
Industrial Crisis:- Industries are dependent on the banks to fund their projects and get the projects good and running. But due to some external factors often the company is not able to keep the agreed terms and thus the banking sector becomes deliberate to call the assets non-profitable as the borrowee could not pay back the amount.
Credit Mismanagement:- Some borrowers often bribe the banking officials making the misuse of their relationship with the official with the very intention of defaulting. This misuse of the funds by borrowers is also often termed as NPA’s.

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Impact of NPA’s

There are many adverse effects of the NPA’s on the Indian Economy. NPA’s are basically the fund that was to be put in use for other projects just vanished in a blink of eye. Few impacts are as follows:

Banks have to improvise their interest rates in order to generate more funds that are needed for balancing the market capital. Their profit margins also suffer because of this.
Depreciation in funds causes the banks to stress their feasibility and there is less money available for funding of other major projects.
This scenario often results in unemployment as well.
NPAs related cases add more pressure to already pending cases with the judiciary.
This NPA also hampers the need of genuine borrowers and borrowers with good credit score. They cannot fulfill their requirements due to non-availability of the funds.
Shareholders also pull off their hands when there is high NPA against the firm.

How can the NPA crisis be resolved?

NPA is like a bone stuck in the throat of the Banks and the Indian Government. Government is planning many steps to recover the lost NPA’s so as to balance the current scenario of the Banking Sectors. As of March 2019, there was approximately 8.06 lakh crore NPA in the market.

Few steps that could be taken to solve this crisis are as follows:

Devise role, purpose and business strategies for the Public Sector Banks.
Incentivize Public Sector Banks to attract better talents for Job.
Penalize wrong actions and enforce strict enforcements.
Create a secondary market for NPA’s and promote transparency and autonomy.
Couple the business intelligence to meet traditional means.
Strengthen RBI’s Supervisory capacity.

This is all about the NPA in descriptive form and the measures that are needed to be taken in order to strengthen our economy and reduce the market cash in the form of loans. This blog is written with an intent to familiarise the reader with the concepts of NPA and the steps that are being taken by the government in order to reduce this reserve. This will be very helpful for the candidates appearing for the banking exams and the interview. For more such updates regarding the exams and the study material please keep following Oliveboard.

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Non Performing Assets (NPA)- Banking for JAIIB