Non –Performing Assets- A Damocles Sword to the Banking Sector

Any financial institution operating in the realm of lending, is exposed to “credit risk” [ a probability that the principal and/or accrued interest thereon may not be recovered, either in total or partially]. The amounts lend by a financial institution, in general and by a bank, in particular, are assets of that financial institution and bank, as the case may be. A Non-performing asset [NPA] is defined as a “credit facility in respect of which the principal installment   and/or interest on the principal has remained ‘past due’ for a specified period of time, thereby implying that the delinquent asset has ceased to generate income for the institution. A loan or asset, as it is often referred, is deemed to be a NPA when the borrower has failed to service the debt, in terms of installment and interest, for a period exceeding 90 days. This cut-off of “90 days’ overdue” has been adopted, effective March 31, 2004, keeping in view the best practices adopted by the financial institutions across the world.

Accordingly, with effect from March 31, 2004, a non-performing asset [NPA] is one which satisfies any one of these conditions

• In case of a Term Loan, where interest and/or installment of principal remain overdue for a period of more than 91 days
• In case of an Overdraft or Cash Credit {OD/CC] , the account remains ‘out of order’ for a period of more than 90 days
• In case of Bills Purchased or Discounted, the Bill remains overdue for a period of more than 90 days
• In case of Advances granted for Agricultural Purposes , the Interest and/or installment of principal remains overdue for two harvest seasons, but for a period not exceeding two half years.
• In case of any other Account, where any amount to be received, remains overdue for a period of more than 90 days.
• In case of Cash Credit Facilities enjoyed by the by the business segment, non-submission of Stock Statements for 3 continuous Quarters. .
• In case of Cash Credit, Overdraft etc where the account had no active transactions for a period exceeding 90 days.

In the next blog we will discuss the causes for the same and how it is expected to impact the financial segment of the economy.

 

Soman Nambiar

Sr. Professor,

School of Management,

Presidency University

[This is first of series of articles on the sensitive topic of Non Performing Assets [NPA } as applicable to the financial institutions/banking sector. The author will endeavor to explain, over the next few articles, the nature of Non Performing Assets, the causes therefore and its impact on the financial position of the bank, the banking industry and the economy as a whole. The author can be contacted on soman@presidency.edu.in