MODULE-1 Flashcards
Non-performing Assets- Definition 1
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
Non-performing Assets- Definition 2
A non-performing asset (NPA) is a loan or an advance where;
i. interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan,
ii. the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC).
iii. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.
iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops,
Out of Order’ status
A CC/OD account shall be treated as ‘out of order’ if:
i) The outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
ii) The outstanding balance in the CC/OD account is less than the sanctioned
limit/drawing power but there are no credits continuously for 90 days, or the
outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.
‘Overdue’ status
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. The borrower accounts shall be flagged as overdue by the banks as part of their day-end processes for the due date, irrespective of the time of running such processes.
Categories of NPAs
Banks are required to classify non performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:
(i) Substandard Assets
(ii) Doubtful Assets
(iii) Loss Assets
Substandard Assets
With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Assets
With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly. 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
Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular.
