So, with all the hoopla around the NPA and the ongoing debates about how banks should deal with, I too couldn't resist the temptation and decided to find out what the entire story is about!
So, what is an NPA? Or a non performing asset? Simply speaking, an NPA is something which has stopped giving profits to bank and more often than not, has become a liability. Just remember your college days when you took a small loan from one of your friends, say 500 and forgot to return it. There could be many reasons, you might have forgotten it or simply didn't want to return the money! That, my dear friends, is some sort of an NPA for your friend.
Now amplify the amount involved by a huge proportion, say, 10000 times and replace your friend with a Bank that you took the amount from in return of a promise of a regular interest and of course, returning the whole booty, albeit after a relatively long time. Now something happened and by some strange turn of events, you are actually unable to pay back the amount and default on the loan taken, which is just a banking term to mean you stopped paying bank the money. Or you are a simply a jerk and decide, one fine morning that enough is enough and stop paying bank, even though you could do that, in theory!
That again, my friend is what we and more importantly, the mighty banks call an NPA. Though this is not so common as one might think, some debts do turn sticky. The borrower is unable or unwilling to pay. Now, to get into more details, there can be different types of loans such as home loan, personal loan, vehicle loan, crop loan and so on. However, for this discussion, we will categorize a loan into two major types: Secured and Unsecured loan. Secured loan is where you pledge something in return for the loan amount advanced to you! This is where mortgages come in (Another article, I believe!) This is the kind of loan which bank prefers since they would be having something to fall upon, if the loan turns bad. This is also known as collateral loan! And the other kind is, well you guessed it right, unsecured loan! I don’t think I need to explain what it means now!
Now, without wasting more time, let me explain how a loan/advance turns into an NPA! Well, let’s get back to our example when you loaned some amount of money from your friend. Now, obviously, it will not turn into an NPA or your friend will not consider that you will not pay him back if you fail to him the very next day/week. He will start getting worried if you don’t pay him, after, say 2 months. He will really get sticky if you fail to him for the next 30 days also! And even after that, if you fail to pay, he will give up his hopes and forget about the money! Or in banking terms, write off his debt! There you learned a new term!
Banks (All financial institutions except regional rural banks!) actually follow something very similar to what your friend has done! It will not classify you as defaulter or write off its loans the first time you fail to pay your installments! It will wait for some time and that some time is actually dictated by none other than RBI! And that some time is 90 days! So if you fail to pay your bills or pay your interests/installments of principles, then bank will classify that loan as an NPA. There are other technicalities like crop season, a loan cannot be classified as an NPA if collateral is any govt. bonds such as KVP, NSC and like, but the general idea is of 90 days.
Now NPAs are actually categorized into three parts, Sub-Standard Assets, Doubtful Assets and Loss Assets. A Sub-Standard asset is an asset that has remained NPA for up to 12 months, doubtful assets is an asset that has remained sub-standard for up to 12 months and the baap of all, a loss asset an asset that the bank or its auditors or the RBI has identified as a loss, but the amount has not been written off entirely.
In exceptional cases, such as fraud by the borrower, the above mentioned stages of NPA can be skipped. The asset can directly be treated as a doubtful asset or loss asset.
Now, coming back to security that you have deposited with the banks, if the realizable value of the security (The amount that the bank will get if they sell the security) is less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection, and then the asset will be treated as doubtful. If the realizable value of the security, as assessed by the bank or valuers or RBI is less than 10% of the amount outstanding, then the existence of the security is to be ignored. The NPA asset will be immediately treated as a loss asset.
Now, this I believe is a fair introduction of world of NPA’s. There are a few things left, such as provisioning an NPA and restructuring. Let’s jump on them after we have digested this one!
So, what is an NPA? Or a non performing asset? Simply speaking, an NPA is something which has stopped giving profits to bank and more often than not, has become a liability. Just remember your college days when you took a small loan from one of your friends, say 500 and forgot to return it. There could be many reasons, you might have forgotten it or simply didn't want to return the money! That, my dear friends, is some sort of an NPA for your friend.
Now amplify the amount involved by a huge proportion, say, 10000 times and replace your friend with a Bank that you took the amount from in return of a promise of a regular interest and of course, returning the whole booty, albeit after a relatively long time. Now something happened and by some strange turn of events, you are actually unable to pay back the amount and default on the loan taken, which is just a banking term to mean you stopped paying bank the money. Or you are a simply a jerk and decide, one fine morning that enough is enough and stop paying bank, even though you could do that, in theory!
That again, my friend is what we and more importantly, the mighty banks call an NPA. Though this is not so common as one might think, some debts do turn sticky. The borrower is unable or unwilling to pay. Now, to get into more details, there can be different types of loans such as home loan, personal loan, vehicle loan, crop loan and so on. However, for this discussion, we will categorize a loan into two major types: Secured and Unsecured loan. Secured loan is where you pledge something in return for the loan amount advanced to you! This is where mortgages come in (Another article, I believe!) This is the kind of loan which bank prefers since they would be having something to fall upon, if the loan turns bad. This is also known as collateral loan! And the other kind is, well you guessed it right, unsecured loan! I don’t think I need to explain what it means now!
Now, without wasting more time, let me explain how a loan/advance turns into an NPA! Well, let’s get back to our example when you loaned some amount of money from your friend. Now, obviously, it will not turn into an NPA or your friend will not consider that you will not pay him back if you fail to him the very next day/week. He will start getting worried if you don’t pay him, after, say 2 months. He will really get sticky if you fail to him for the next 30 days also! And even after that, if you fail to pay, he will give up his hopes and forget about the money! Or in banking terms, write off his debt! There you learned a new term!
Banks (All financial institutions except regional rural banks!) actually follow something very similar to what your friend has done! It will not classify you as defaulter or write off its loans the first time you fail to pay your installments! It will wait for some time and that some time is actually dictated by none other than RBI! And that some time is 90 days! So if you fail to pay your bills or pay your interests/installments of principles, then bank will classify that loan as an NPA. There are other technicalities like crop season, a loan cannot be classified as an NPA if collateral is any govt. bonds such as KVP, NSC and like, but the general idea is of 90 days.
Now NPAs are actually categorized into three parts, Sub-Standard Assets, Doubtful Assets and Loss Assets. A Sub-Standard asset is an asset that has remained NPA for up to 12 months, doubtful assets is an asset that has remained sub-standard for up to 12 months and the baap of all, a loss asset an asset that the bank or its auditors or the RBI has identified as a loss, but the amount has not been written off entirely.
In exceptional cases, such as fraud by the borrower, the above mentioned stages of NPA can be skipped. The asset can directly be treated as a doubtful asset or loss asset.
Now, coming back to security that you have deposited with the banks, if the realizable value of the security (The amount that the bank will get if they sell the security) is less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection, and then the asset will be treated as doubtful. If the realizable value of the security, as assessed by the bank or valuers or RBI is less than 10% of the amount outstanding, then the existence of the security is to be ignored. The NPA asset will be immediately treated as a loss asset.
Now, this I believe is a fair introduction of world of NPA’s. There are a few things left, such as provisioning an NPA and restructuring. Let’s jump on them after we have digested this one!
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