Non-Performing Assets (NPA) - Meaning
Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types.
All those assets which generate periodical income are called as Performing Assets (PA).
While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA).
If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans.
In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.
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India and Non-Performing Assets
In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%.
Types of NPA
NPA have been divided or classified into following four types:-
- Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets.
- Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets.
- Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets.
- Loss Assets : All those assets which cannot be recovered are called as Loss Assets.
These assets can be identified by the Central Bank or by the Auditors.
Provision on types of assets
Provision is allocating money every year to meet possible future loss.
Causes of NPA
NPA arises due to a number of factors or causes like:-
- Speculation : Investing in high risk assets to earn high income.
- Default : Willful default by the borrowers.
- Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.
- Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business.
- Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
- External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.