Financial institutions classify an asset as a Non-Performing Asset depending on the age of the default under that Asset (generally loan given by the institution). Usually, when an Interest or Principle instalment under a loan remains overdue for a specified period of time the loan is classified as NPA.
Non-performing assets affect the health of a financial institution as there is a direct impact on the income earned through interest. Additionally cash flow is also affected when huge Principle instalments become overdue.
With a view to moving towards international best practices and to ensure greater transparency, Indian Banks have adopted the ‘90 days’ overdue’ norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, in an Indian Banking Scenario a non-performing asset (NPA) is a loan or an advance where;
- Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
- An account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
- A bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
- Interest and/or instalment of principal remains overdue for two harvest seasonsbut for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
- Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
- Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.
- No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days
Reasons for Occurrence of NPAs
NPAs result from what are termed “Bad Loans” or defaults. This occurs due to the following reasons:
- Bad lending practices
- A banking crisis (as happened in South Asia and Japan)
- Overhang component (due to environmental reasons, natural calamities, business cycle, Disease Occurrence, etc…)
- Incremental component (due to internal bank management, like credit policy, terms of credit, etc…)