Management of Quality of Non-Performing Assets

Non Performing Assets, as the term implies, do not generate any returns for the bank. In compliance with the Generally Accepted Accounting Practices and in accordance with the Basel norms there is a need for the Banks to classify NPAs into categories based on the migration of the assets from good to bad. The Non Performing Assets have to be brought under any one of the following categories.

  • Substandard Assets: Assets which have remained non-performing for a period less than or equal to 12 months.
  • Doubtful Assets: Assets that remained in the Substandard Category for a period of 12 months.
  • Loss Assets: Assets that are 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.[per RBI definition]

A high level of non-performing assets may be a indicator of the manifestation of the credit risk. Though applicable to all banks, in general, this statement needs to review against the backdrop of the profile of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt. But they compensate this higher risk with higher than normal interest rates and processing fee, thereby increasing the bank spread. In the light of the above and to mitigate the credit and capital risks, there is an onus on the banks to set aside dedicated funds to cover up losses in the event of the assets turning bad. In banking terminology this is referred to as Provisioning. The extent of Provisioning is determined by the Provisioning Coverage Ratio [PCR] which in turn refers to that portion of the loans that should be set aside as contingency.

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