What is NPA in Banking and 3 Important Types of NPA

What is NPA in Banking

In this article we can understand what is NPA in banking? NPA means an overdue loan in the banking language. The full form of NPA is a non-performing asset. If a person takes a loan from a bank and that person gradually becomes unable to repay that loan, then an NPA is created. When the first installment of the loan is missed, the second installment is missed and the third installment is also missed, when the installments of 90 days are missed, the loan is included in NPA. Banks have to adopt different methods to recover such loans.

Types of NPA

After understanding what is NPA in banking let’s know about types of NPA. NPA is classified into three types. The first type is a sub-standard asset, the second type is doubtful NPA and the third type is a loss asset. When a loan does not receive any installment for 90 days or the installment becomes overdue, then that loan is included in NPA. Let us know about these three types in detail.

1. Substandard Asset

When a loan is not paid even after 90 days, then the loan is included in the substandard set for another twelve months after ninety days. That is, after the loan goes into non-performing, the loan that is overdue for twelve months is called a substandard asset.

2. Doubtful Asset

A loan in NPA that could not be recovered for a period beyond twelve months is called a doubtful asset. That is, there is a period after twelve months to be included in doubtful assets.

3. Loss Asset

A loan that is included in substandard assets after being included in NPA and then included in doubtful assets and still the loan has not been repaid or not a single installment has been received is included in the loss set.

Impact of NPA on the bank

The impact of loans included in NPA is seen in the bank.

1. Due to NPA, interest on loans given by the bank stops, due to which the profit of the banks starts decreasing.
2. The money given by the bank as loan remains tied up, thus reducing the capital capacity of the banks.
3. Banks have to spend money to collect the loan or interest on NPA. Therefore, instead of making a profit, banks start focusing on credit risk management and banks incur a lot of expenses.
4. The bank whose NPA is high is making a loss. Therefore, NPA is very harmful to the goodwill of the bank.

Preventive measures to prevent the rate of NPA

1. While giving every loan, the bank should give any loan only after considering that it should earn interest regularly and the bank should make a profit.
2. Before giving a loan to a person, it is very important for banks to check the CIBIL score of that person.
3. To prevent any borrower from becoming bankrupt, it is necessary to follow legal provisions like the implementation of the Bankruptcy Code.
4. Loans should not go into NPA and strict action should be taken against those loans that are in NPA.
5. The bank should disseminate information about the borrowers whose loans are in arrears. So that those people can take action to repay the loan as soon as possible.
6. Along with this, the bank should collect all the information including the salary slip of the person or taking a guarantor, the CIBIL score of all of them, taking other necessary documents and only after collecting all the information, the bank should discuss it and give the loan to the concerned person.

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What do banks do if a non-performing asset is not recovered?

What is NPA in banking – When the bank is unable to recover the loan included in the NPA after trying, then at such a time the NPA amount is written off as a loss and banks have to set aside provisions from time to time to cover such losses.

Example of NPA

What is NPA in banking – If a person has taken a home loan and has not paid the principal and interest for more than 90 days or has not deposited any money with the bank for three consecutive months, then the home loan taken by him is included in the non-performing asset.

NPA in India

What is NPA in banking – Currently, the problem of NPA in India is very serious. But according to official sources, there is a 1.96 lakh crore NPA as of March 2023. However, by the financial year 2023-24, there will be an expected improvement in this NPA or the assets of the banks and it is estimated that the bad loans of the banks will come down to 4.5%.

Also, according to some media reports, there has been a slight decrease in the NPA of scheduled and commercial banks. In March 2019, the estimated number of NPAs was nine crore, but it has come down to five crore by March 2023. Therefore, the NPA situation in India is gradually improving.

How do banks take action on NPA?

To recover the loan that has gone into NPA, banks follow up on it. At the initial stage, banks send a letter to the borrower. Then they meet the guarantor, make contact, ask about the NPA, and ask about the loan, if the installment is not received on time or if the installment is received late, they impose a penalty, three to four times the banks write to the concerned borrower and request him to pay the installment of the related loan smoothly.

If despite this, the borrower refuses to pay his outstanding loan or he is not able to do so, in such a case, the banks have to take strict steps like confiscating the collateral or selling the goods given as collateral to recover the outstanding. And the last resort is that if the borrower is doing this knowingly, then the banks have the right to take legal action in this regard.

G NPA and N NPA

G NPA means Gross Non-Performing Asset and N NPA means Net Non-Performing Asset.

G NPA is the total non-performing assets of a bank in a particular financial year. In short, GNPA is the total principal amount and interest on that loan.

N NPA is the NPA value, that is, the amount left after deducting the provisions made by the bank. The NPA value comes after the bank makes provisions for it.

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What is the difference between assets and non-performing assets in a bank?

If we look at a bank, loans, and advances are the assets of the bank, which means that assets are anything from which the bank will continue to earn income or get financial benefits in the future.

On the other hand, non-performing assets are also bank assets. But these assets have stopped generating income for some time, i.e. the borrower has not paid the principal and interest for 90 days, so the bank’s income has stopped. If the banks’ efforts to recover the loan are successful, such non-performing assets come back to performing assets. And income starts to be earned from them. But if the borrower has not paid any interest or principal to the bank, then it falls into the category of distressed assets or bad assets.