Page 32 - Banking Finance June 2023

ARTICLE

A non-performing asset (NPA) is a loan or an advance where; limit/drawing power but credits are not enough to
Interest and/ or instalment of principal remains overdue cover the interest debited during the previous 90 days
for a period of more than 90days in respect of a term period.
loan,
Types of NPA
The account remains 'out of order' in respect of an
Overdraft/Cash Credit (OD/CC) Sub Standard: A sub-standard asset was first defined
as one which was classified as NPA for a period not
The bill remains overdue for a period of more than 90
exceeding two years. However, on 31 March 2005 the
days in the case of bills purchased and discounted
RBI changed the duration to 12 months and therefore
The instalment of principal or interest thereon remains
a sub-standard asset now was that which has remained
overdue for two crop seasons for short duration crops
an NPA for a period less than or equal to 12 months. In
The amount of liquidity facility remains outstanding for such cases, an asset will have well defined credit
more than 90 days, in respect of a securitisation weaknesses which means that the borrower is unable
transaction undertaken in terms of the Reserve Bank to cover his total liabilities/exposure which will
of India(Securitisation of Standard Assets) Directions, jeopardize the liquidation of the debt and there is a
2021 as amended from time to time distinct possibility that the banks will sustain some loss
if the shortcomings are not corrected.
In respect of derivative transactions, the overdue
receivables representing positive mark-to-market value Doubtful: A doubtful asset was first defined as one
of a derivative contract, if these remain unpaid for a which remained as an NPA for a period exceeding two
period of 90 days from the specified due date for years. However, on 31 March 2005 the RBI changed
payment. the duration to 12 months and therefore a doubtful
asset was that which an NPA remained for a period
'Out of Order' status: exceeding 12 months. When a loan is classified as
doubtful, the assets have all the same weaknesses that
A CC/OD account shall be treated as 'out of order' if:
were found in assets classified as sub-standard but also
The outstanding balance in the CC/OD account remains
with the added aspect that the weaknesses make
continuously in excess of the sanctioned limit/drawing
collection or liquidation in full of the borrower on the
power for 90 days, or
basis of the existing facts, conditions and values highly
The outstanding balance in the CC/OD account is less
uncertain and improbable.
than the sanctioned limit/drawing power but there are
Loss: A loss asset is one where a loss has been identified
no credits continuously for 90 days, or the outstanding
by the bank or by the internal or external auditors or
balance in the CC/OD account is less than the sanctioned
by the RBI inspection but the amount has not been
written off completely. In other words, such an 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.
These are the three categories in which NPAs are
classified as. The RBI has provided guidelines to banks
to efficiently and fairly classify assets as non-performing.
These guidelines in a nut shell state that classification
of assets into above categories should be done by
considering the degree of well-defined credit
weaknesses and the extent of dependence on collateral
security (for example promoter guarantee, shares, real
estate etc.) for realization of dues.

BANKING FINANCE | JUNE | 2023 | 29