What are NPA’s?
- A loan is an asset for a bank as the interest payments and the repayment of the principal amount create a stream of cash flows. It is from the interest payments than a bank makes its profits.
- Banks usually treat assets as non-performing if they are not serviced for some time. If payment has not been made as of its due date then the loan gets classified as past due.
- Once a payment becomes really late the loan gets classified as non-performing. A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
Types of NPA’s
- Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets:-
- Substandard assets: An 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.”
Reasons of Bad Loan:
- At the outset, it has to be admitted that no bank can have zero NPA.
- One of the primary reasons for NPA could be that the lending decision was, ab initio, incorrect.
- Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers.