What Is Non Performing Assets? How Banks Get Losses | नॉन परफॉर्मिंग एसेट्स क्या है | जानिए बैंकों को कैसे होता है नुकसान

NPA is defined as a loan asset, which stops providing any income to bank, or more precisely, the asset is no longer providing cash flow to bank, whether in the form of interest or as repayment of loan amount.

                              An Introduction to NPA

Introduction to Non-Performing Asset (NPA)  

Banking Sector being backbone of Indian economy is governed by laws & judiciary procedures specifically formulated for its processes, like lending, debts recovery etc.


बैंकिंग क्षेत्र भारतीय अर्थव्यवस्था की रीढ़ है, जो कानूनों और न्यायपालिका प्रक्रियाओं द्वारा संचालित होता है, विशेष रूप से इसकी प्रक्रियाओं के लिए तैयार किया जाता है, जैसे ऋण देना,   आदि।


Non-Performing Asset is a key factor in Banking industry and impacts general public. Therefore, it becomes essential that everyone shall know the basic of NPA and laws governing the bank to regulate NPAs.


नॉनफ़ॉर्मिंग एसेट बैंकिंग उद्योग का एक महत्वपूर्ण कारक है और आम जनता को प्रभावित करता है। इसलिए, यह आवश्यक हो जाता है कि सभी को एनपीए की मूल जानकारी हो और एनपीए को विनियमित करने के लिए बैंक को नियंत्रित करने वाले कानून।




सरल शब्दों में, एनपीए को ऋण परिसंपत्ति के रूप में परिभाषित किया जाता है, जो बैंक को कोई आय प्रदान करना बंद कर देता है, या अधिक सटीक रूप से, परिसंपत्ति अब बैंक को नकद प्रवाह प्रदान नहीं कर रही है, चाहे वह ब्याज के रूप में हो या ऋण राशि की अदायगी के रूप में।


 This topic is an elementary introduction to Non-Performing Asset. Among various aspects of Banking sector, Non-Performing Asset is a significant element.   




Key Elements of NPA


NPA is a loan or an advance where;

# Interest and/ or installment of the principal amount have become overdue for a period of more than 90 days.

# The account remains “out of order” in respect of an overdraft/ cash credit

# The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted

# In terms of agricultural loans, if its installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops.  



Indian Banking System & Its Evolution


The Indian banking system consists of commercial and cooperatives banks, out of which commercial   banks   account   for   almost   90 percent   of   the   total banking system’s assets.

In India or any other country, commercial banks play a   very important part of the nation’s banking and financial system Commercial bank are a purely a profit oriented financial institution that accepts deposits   from the public and   offers loans   to the public. A commercial bank can be either a public bank or a private bank or a bank being operated by a consortium comprising foreign banks. 


In India, till the year 1991, there existed no concern for quality of asset in Indian banking system. The banks used to rank and pride by the count an outreach of their branches. Post economic liberalization in 1991, the focus shifted to the quality of assets being held by any bank, and the index of trust a bank harbors among consumers. This axial shift in thought paradigm was rooted when   former RBI Governor   Mr. M Narasimham was appointed to   review the banking system to unleash the potential of banking system in   India   in   terms   of   increased banking efficiency and improvised customer services.

 The primary function of any bank is to deposit   funds   and   to   grant loans   to varied   sectors like   personal   loans, housing   loans, agricultural and industrial loans.

But in the recent years, the increasing non-performing assets have been a very major concern for the banking sector due to which banks have become very vigilant and stringent in extending loans



Some Facts


  1. The concept of non-performing asset in banking system is only limited to loans. When a loan asset ceases to generate income (EMI, interest, or any other dues) for bank for more than 90days, then that loan asset is declared to be an NPA.


  1. As per a report of Reserve Bank of India, the gross nonperforming assets in Indian banks is estimated at around Rs. 440,000 crore,
  2. Out of   which   90   percent   of   the   NPA   is   accounted   by   the   public   sector   banks.
  3. Narasimham Committee was the first ever committee that made it compulsory to identify and reduce the NPA and to treat this issue as a concern of national priority.
  4. Due to NPA, banks face credit risk and also become inefficient in allocating resources
  5. Non-Performing Assets (NPAs)Today   NPAs   are   the   matter   of   utmost  concern   in   the   banking   sector   or   other 
  6. Commercial   loans   become NPA when they are overdue for more than 90 days, whereas consumer loans become NPA, when they are due for more than 180 days.
  7.  Recently, there have been various cases by India’s major corporate   houses   which   are   pending   with   the   Indian   Banks.   Bhushan   Steel   is   one   such example who defaulted on an amount of Rs. 56,022 crore, out of which only 63.5% (= Rs.35, 571 crore) has been realized till now.





Kinds of NPA & Asset Classifications     


 NPA Kinds


There are 2 kinds of NPA:

  • Gross NPA

Gross NPA is the overall quantitative amount of all those loans that have gone bad debts. It is an advance which is written off, for which bank has made provisions, and is still in bank’s book of accounts.


सकल एनपीए उन सभी ऋणों की कुल मात्रात्मक राशि है जो खराब ऋण गए हैं। यह एक अग्रिम राशि है जो बंद लिखी जाती है, जिसके लिए बैंक ने प्रावधान किए हैं, और अभी भी बैंक की बही खातों में है


Gross NPAs Ratio = Gross NPAs / Gross Advances


  • Net NPA

Those NPAs in which, the banks have deducted the provisions regarding NPAs from the Gross NPAs are known as Net NPAs.



Net NPA = Gross NPA – Provisions


Asset Classification        


Assets can be classified into 3 types:


जिन एनपीए में, बैंकों ने एनपीए से संबंधित प्रावधानों में कटौती की है सकल एनपीए को नेट एनपीए के रूप में जाना जाता है।

·         Standard Assets


Those assets which are not facing any problem and are not posing anymore risk towards the customer   is known   as   standard   assets.   These   standard   assets are   considered as performing assets. A general provision of 0.25% is necessary to be provided on basis of global loan portfolio.


·         Sub-Standard Assets

Any asset which is remained   NPA for   a   period   less   than or equal to 12 months is classified as sub-standard asset. A general provision of 10% on outstanding has to be provided on sub-standard assets.

·         Doubtful Assets

Such assets which have remained as Non-Performing Asset (NPA) for a period exceeding 12 months and which are not loss advance are known as doubtful assets. As per RBI, it is must for banks to facilitate 100% of unsecured amount of pending loan







Reasons behind Non-Performing Asset (NPA)



There are several reasons for a loan asset account becoming a non-performing asset. The increasing NPAs is the net result of this situation and which costs the banks so much and finally it leads to the higher cost of the banking services. One of the main reasons behind the increasing NPAs is the prescribed percentage of credit of the banking sector to the priority sectors. And this percentage is too high, i.e., 40 percent. Indian banking sector doesn’t faces lack of stringent norms but rather they face various legal impediments and time consuming asset disposal process.





It is very important for a banking sector to flourish; otherwise it directly impacts the economy and the financial power of the country. The increasing non-performance assets are nothing but failure of   the   banking   sector   which   also   indirectly   affect the   other   sectors.   Earlier, the   Indian banking sector was being operated in a closed economy but since when it has been open to the economy, it has faced various challenges.


  • Consumer Factor: willful defaults, siphoning of the borrowed funds, frauds, loan disputes and misappropriation are the additional reasons.


Jet Airways was classified as NPA in Q4 by ICICI Bank Ltd, which also led to decline in the share   of ICICI   Bank.  The bank had made   sufficient   provisions against the debt   of   Jet Airways.   Bank had classified   the   fund based exposure   of   Rs.276 Crore towards IL&FS as NPA and made a provision of Rs.146 Crore.

Sachin Dave. ICICI Bank to fire forensic auditor to probe into NPA irregularities, and bank decided to appoint a forensic auditor to probe allegations against irregularities in 31 loan accounts. Such appointed was done by assertion of SEC (US Securities & Exchange Commission). An anonymous ICICI Bank Employee had reported such irregularities in operations of bank.



  • Internal Factor: On the other hand, internal factors also include the deficiency on the side of the banks, when the banks fail to monitor the loan assets, and delay in follow-ups with the borrower for settlement of the loan accounts.
  • External Factors: External factors are other factors   that   are   due to policies, environmental, legal and   social factors.
  • Disputes & Legal Complexities:  Sluggish legal system is one of the major external factors as there are never ending disputes   and   lack   in   sincere   efforts   by   the   legal   system   to   settle   the   disputes. 
  • Government Policies:  government   policies   like   excise   and   import   duties   affect   the banking   sector


Indian Banks living with NPAs

This NPA problem is not new and has been existing for more than decades. It was the year 1989-

1990, when the Prime Minister VP Singh, had given a huge waiver of Rs. 15,000 crores for the rural loan accounts. Although the act undertaken by the Prime minister would have been in good faith, its long-term impact was very negative, as the payer and borrower did not used to feel obliged to pay their debts to bank. Such habitual not paying instances went on mounting NPAs on Indian Banking sector

1990, जब प्रधान मंत्री वीपी सिंह ने रुपये की भारी छूट दी थी। ग्रामीण ऋण खातों के लिए 15,000 करोड़ रुपये। यद्यपि प्रधान मंत्री द्वारा किया गया कार्य अच्छे विश्वास में होगा, इसका दीर्घकालिक प्रभाव बहुत नकारात्मक था, क्योंकि भुगतानकर्ता और उधारकर्ता बैंक को अपने ऋण का भुगतान करने के लिए बाध्य महसूस नहीं करते थे। भारतीय बैंकिंग क्षेत्र पर बढ़ते एनपीए के कारण ऐसी आदतों का भुगतान नहीं हुआ

  • There are two factors for a loan account becoming a non-performing asset, internal factor and external factor. Internal factors are related to the funds and the borrower like when the funds borrowed for any particular purpose is not used for that purpose
  • Also related to Internal factor, is the project being delayed inordinately (not being completed in the stipulated time), for which that purpose loan on such projects start becoming NPA
  • Industrial recession and shortage of raw materials, power or resources are also the key driver factors for causing the situation of NPA.

 Impact Analysis

This NPA problem compound in multi-spectral impacts, ranging from slowing economic growth, employment loss etc. Salient impacts are:

  1. Shrinking Credits Halts Industrial growth: Increasing NPAs lead to the shrinking of availability of credit to the public, and hence the funds are not available to the public at large and event to higher priority sectors like energy, agro etc. These continuously growing non availability of credits overall mounts to halting the economy and industrial sector.  
  2. Diminished Credibility of Indian Banking Industry: Indian banks lose out their credibility among public as well as foreign trade partners, and cash flow ecosystem. International traders and investors refrain from allowing wealth any money investment in India. Even the confidence of common citizen in banking system destabilizes which leads to lesser deposits and mass withdrawals. In such scenario, upkeep the operational setup and workflow ceases, leading to the collapse of the entire bank.
  3. Definitive Steps Required to Keep NPAs in Sustainable Limit: Banking processes shall be refined & optimized with vigilante unites or workgroups to eliminate risks of mounting NPAs, and corrective measure shall be put pre-hand for keeping NPAs within sustainable limits. The NPAs. Also the proactive inclusion of external auditors, inhouse audit centers should be refining and implementing the NPA checks, audits, recovery validations, and all minor deviations shall be preceded with legal recourse. Only when credit is available to the public in excess through banks, then only new entrepreneurs could establish new companies, which in turn would   generate   employment and will lead   to   a better and robust   economy.


Hence, it is very important that banking sectors be stabilized and NPAs should be controlled through its effective management.


बैंकिंग क्षेत्र भारतीय अर्थव्यवस्था की रीढ़ है, जो कानूनों और न्यायपालिका प्रक्रियाओं द्वारा संचालित होता है, विशेष रूप से इसकी प्रक्रियाओं के लिए तैयार किया जाता है, जैसे ऋण देना,  आदि।

नॉनफ़ॉर्मिंग एसेट बैंकिंग उद्योग का एक महत्वपूर्ण कारक है और आम जनता को प्रभावित करता है। इसलिए, यह आवश्यक हो जाता है कि सभी को एनपीए की मूल जानकारी हो और एनपीए को विनियमित करने के लिए बैंक को नियंत्रित करने वाले कानून।

सरल शब्दों में, एनपीए को ऋण परिसंपत्ति के रूप में परिभाषित किया जाता है, जो बैंक को कोई आय प्रदान करना बंद कर देता है, या अधिक सटीक रूप से, परिसंपत्ति अब बैंक को नकद प्रवाह प्रदान नहीं कर रही है, चाहे वह ब्याज के रूप में हो या ऋण राशि की अदायगी के रूप में।



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