Page 34 - Banking Finance September 2018

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economic risk for the Indian banking sector. Stressed assets been modified into a new loan. Whether the borrower will
are a powerful indicator of the health of the banking system. repay it in future remains a risky element.
To understand stressed assets we have to understand NPA
and Restructured assets. This is because: What is written off assets?

Stressed assets = NPAs + Restructured loans + Written off Written off assets are those the bank or lender doesn't count
assets the money borrower owes to it. The financial statement of
the bank will indicate that the written off loans are
Assets of the banking system comprises of loans given and compensated through some other way. There is no meaning
investment (in bonds) made by banks. Quality of the asset that the borrower is pardoned or got exempted from
indicates how much of the loans taken by the borrowers are payment
repaid in the form of interests and principal. The most
important scale of asset quality is Non-Performing Assets What is Special Mention Accounts?
(NPA). An NPA means interest or principal is not repaid by Health of advance accounts is determined by their
the borrower during a specified time period. Bad assets are categorization as SPECIAL MENTION ACCOUNT. The Special
further classified into substandard asset, doubtful asset, and Mention Accounts are usually categorized in terms of
loss assets depending upon how long a loan remains as an duration of overdue in the account. For example, in the case
NPA. of SMA -1, the overdue period is between 31 to 60 days. On
the other hand, an overdue between 61 to 90 days will
Measuring stressed assets make an asset SMA -2.If there is no sign of improvement in
But NPA alone doesn't tell the whole story of bad asset their overdue status, the accounts are further deteriorated
quality of loans given by banks. Some of the loans are to NPA accounts amounting to a major chunk of stressed
restructured by banks by giving a further opportunity to the assets of our Banking industry.
borrower if they default. This opportunity is in the form of
an extended time period for repayment and a reduced SMA Sub Category Classification basis
interest rate or such soft conditions. Hence a new SMA-0 Principal or interest payment
classification is made in the form of stressed assets that overdue between 1-30days.
comprises restructured loans and written off assets besides
SMA- 1 Principal or interest payment
NPAs.
overdue between 31-60days.
SMA - 2 Principal or interest payment
Stressed assets = NPAs + Restructured loans + Written off
overdue between 61-90 days.
assets

What is an NPA?
A loan whose interest and/or instalment of principal have
remained 'overdue ' (not paid) for a period of 90 days is
considered as NPA.

What is a restructured loan?
Restructured asset or loan are that assets which got an
extended repayment period, reduced interest rate,
converting a part of the loan into equity, providing additional
financing, or some combination of these measures. Hence,
under restructuring a bad loan is modified as a new loan. A
restructured loan also indicates bad asset quality of banks.
This is because a restructured loan was a past NPA or it has

34 | 2018 | SEPTEMBER | BANKING FINANCE