Non-Performing Assets: Definition

Nowadays, there have been many talks about the issue of Non-Performing Assets or NPAs as the banking sector of India is saddled with it. Huge magnitude of NPAs is considered to be a sign of threat to the ease of lending of credit and in turn the growth of the country’s economy. In this series of posts, we will understand about various aspects related to NPAs including its basics, causes, measures taken and the way ahead.

In this series of posts, we will understand about various aspects related to NPAs including its basics, causes, measures taken and the way ahead.

Definition:

  • NPA or the Non-Performing assets etymologically means –> the assets which do not perform.
  • These are those assets which do not bring anything in return.
  • Before going further, it is important to understand the concept of assets and liabilities with respect to banks.
    • Assets: Loans/advances given to the customers by banks. It is an asset because banks will get an interest on them.
    • Liabilities: These are the deposits of the customers and the banks have to pay an interest on them. Thus, it is a liability for them.
  • The Reserve Bank of India terms an NPA as the loan/advance whose principal or interest remains overdue for a period of 90 days or more from the end of a particular quarter.  (a 3 month period; first quarter begins in the month of April in India)
  • When we use the term overdue, it means the excess number of days after the due date (the date on which it was meant to be returned with or without interest).

Classification:

  • Substandard Assets
  • Doubtful Assets
  • Loss Assets

 

  • Substandard assets: if a loan remains bad loan/NPA for 12 months.
  • Doubtful: if a loan remains substandard for 12 months.
  • Loss: a loan on which loss has been construed by auditors.These are the uncertain assets.

Example:

The Kingfisher Airlines of Vijay Mallya took around 7,000 crore of loans from different banks. These were lent as the airlines was performing well (and might be a few other officially unknown reasons as well).

But, as the fuel prices hiked, airlines started to book huge losses rendering it incapable to repay the loans.

These loans remaining overdue were converted into huge Non-Performing Assets now.

Impacts of the NPAs:

  • Loss of capital of banks leading to their inefficiency.
  • With huge losses, the lending capability of banks is negatively affected.
  • With lower lending, the domestic investment may suffer.
  • Lower investment will, in turn ,affect the growth indicators of the country.
  • Piling up of NPAs is a major cause of lack of transmission of the Repo Rate cuts(by RBI) to the consumers by the commercial banks.

In the next article, we will discuss about the mechanisms in place to tackle the menace of NPAs.

 

 

 

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