This article describes the concepts regarding Non-performing Assets like Meaning, Classifications, Causes, and the impacts of NPA in short.

1. CONCEPTS OF NPA- NON PERFORMING ASSET

2. Definition: A non performing asset (NPA) is a loan or advance for which the
principal or interest payment remained overdue for a period of 90 days.
A ‘non-performing asset’ (NPA) was defined as a credit facility in
respect of which the interest and/ or instalment of principal has
remained ‘past due’ for a specified period of time ie.90days.

3. Classification of NPA
Banks are required to classify NPAs further into Substandard, Doubtful and
Loss assets.
1. Substandard assets: Assets which has remained NPA for a period less
than or equal to 12 months.
2. Doubtful assets: An asset would be classified as doubtful if it has
remained in the substandard category for a period of 12 months.
3. Loss assets: As per RBI, “Loss 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.”

4. RBI changes NPA classification period to 180 days
from 90 days:
According to the RBI's latest announcement, the bad loan
classification period now changes from 90 days to 180 days
for all such accounts. The accounts turn non-performing
assets (NPAs) after 90 days of overdue in making payments.
The accounts are classified as standard before the 90-day
period. In addition, the RBI also allowed the NBFCs to grant
relaxed NPA classification to the borrowers.

5. Why assets become NPA?
A several factors is responsible forever increasing size of NPAs in PSBs. The Indian banking
industry has one of the highest percents of NPAs compared to international levels. A few
prominent reasons for assets becoming NPAs are as under :
 Lack of proper monitoring and follow-up measures.
 Lack of sincere corporate culture. Inadequate legal provisions on
foreclosure and bankruptcy.
 Change in economic policies/environment.
 Non transparent accounting policy and poor auditing practices.
 Lack of coordination between banks/FIs.
 Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from
their own sources or public issue due to market turning unfavorable.
 Criteria for classification of assets

6. Underlying reason for NPA in India
An internal study conducted by RBI shows that in the order of prominence ,the following factor contribute to NPAs.
Internal Factor Diversion of funds for
 Expansion/diversification /modernization
 Taking up new project - Helping /promoting associate concerns time/cost overrun during the project
implementation stage Business Failure
 Inefficiency in management
 Slackness in credit management and monitoring
 Inappropriate Technology/technical problem Lack of coordination among lenders
External Factor
Recession
Input/power storage
Price escalation
Exchange rate fluctuation Accidents and natural calamities, etc.
 Changes in government policies in excise/ import duties, pollution control orders, et

7. NPA – Impact on Banks
Profitability
Asset (Credit) contraction
Liability Management
Capital Adequacy
Shareholders’ confidence
Public confidence