All You Need To Know About NPA. How to Reduce NPA?

Dear Candidates,

We are providing you an article on None Performing Assets, which can be helpful in your interview preparation.

Now a days cases of Non Performing Assets
(NPA) are increasing day by day in the banking sector which is a matter of
serious economic concern.

If the status of NPAs in banks is not controlled,
banks can become bankrupt. The entire credit distribution structure of the
economy can be destructed and the country could be in a major financial
turmoil.

Know About NPA – An asset (loan),
including a leased asset, becomes non performing when it stops generating
income for the bank.

Note: Once the borrower has failed to make
interest or principle payments for 90 days the loan is considered to be
a non-performing asset. It had been decided to adopt the ’90
days’ overdue’ norm for identification of NPA, from the year ending March 31,
2004.

NPAs can be classified in three categories:

Sub_standard Assets: With effect from March 31, 2005, a substandard asset would
be one, which has remained NPA for a period less than or equal to 12 months.

Doubtful Assets: With effect from March 31, 2005, an asset would be classified as
doubtful if it has remained in the sub_standard category for a period of 12
months.

Loss Assets – A loss asset is one where loss has
been identified by the bank or internal or external auditors or the RBI
inspection but the amount has not been written off wholly. In other words, such
an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some rescue
or recovery value.

Reasons for Occurrence of NPAs

NPAs can be termed as “Bad Loans”
or defaults. It is the failure to meet financial obligations, non-payment of a
loan installment. These loans can occur due to the following reasons:

(i) Normal
banking operations

(ii) Bad lending
practices

(iii) Incremental component (due to internal bank management, like credit policy,
terms of credit, etc…)

(iv) Competition
banks are enormously selling unsecured loans

The Problems caused by NPAs: NPAs
do not just reflect badly in a bank’s account books, they adversely impact the
national economy.

Following are some of the impacts of NPAs:

1. Depositors
do not get rightful returns and many times may lose uninsured deposits. Banks
may begin charging higher interest rates on some products to compensate
Non-performing loan losses

2. Bank
shareholders are adversely affected

3. Bad loans
imply redirecting of funds from good projects to bad ones. Hence, the economy
suffers due to loss of good projects and failure of bad investments

4. When bank do
not get loan repayment or interest payments, liquidity problems may ensue.

Result of NPAs on an organization

1. Decrease
profitability.

2. Reduce
capital assets and lending limits.

3. Increase
loan loss reserves.

How to reduce NPA? – Non Performing Assets can be reduced by
taking some major steps by the banks. Some steps are as follows by which bank
can reduce NPA –

1. SARFAESI ACT 2002

The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) empowers Banks / Financial
Institutions to recover their non-performing assets without the intervention of
the Court.

The Act provides three
alternative methods for recovery of non-performing assets, namely: –

i. Securitisation

ii. Asset
Reconstruction

iii. Enforcement
of Security without the intervention of the Court.

The provisions of this Act are
applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan
accounts where the amount is less than 20% of the principal and interest are
not eligible to be dealt with under this Act.

Non-performing assets should be
backed by securities charged to the Bank by way of hypothecation or mortgage or
assignment. Security Interest by way of Lien, pledge, hire purchase and lease
not liable for attachment under sec.60 of CPC, are not covered under this Act

The Act empowers the Bank:

(i.) To issue
demand notice to the defaulting borrower and guarantor, calling upon them to
discharge their dues in full within 60 days from the date of the notice.

(ii.)
To give notice to any person who has acquired any of the secured assets from
the borrower to surrender the same to the Bank.

(iii.)
To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.

(iv.) Any Security Interest created over Agricultural Land cannot be proceeded with.

If on receipt of demand notice,
the borrower makes any representation or raises any objection, authorised officer shall consider such representation or objection carefully and if he
comes to the conclusion that such representation or objection is not acceptable
or tenable, he shall communicate the reasons for non acceptance WITHIN ONE WEEK
of receipt of such representation or objection.

A borrower / guarantor aggrieved
by the action of the Bank can file an appeal with DRT and then with DRAT, but
not with any civil court. The borrower / guarantor has to deposit 50% of the dues
before an appeal with DRAT.

If the borrower fails to comply
with the notice, the Bank may take recourse to one or more of the following
measures:

(i) Take
possession of the security

(ii) Sale or
lease or assign the right over the security

(iii) Manage the same or appoint any person to manage the same

2. Lok Adalats: Lok Adalat is for the recovery of small
loans. According to RBI guidelines issued in 2001, they cover NPA up to Rs. 5
lakhs, both suit filed and non-suit filed are covered.

3. Compromise Settlement: It is a scheme which provides a simple
mechanism for recovery of NPA. It is applied to advances below Rs. 10 Crores.

4. Credit Information Bureau: A Credit Information Bureau help banks by
maintaining a data of an individual defaulter and provides this information to all
banks so that they may avoid lending to him/her.

5. DEBT RECOVERY TRIBUNALS: The debt recovery tribunal act was passed by
Indian Parliament in 1993 with the objective of facilitating the banks and
financial institutions for speedy recovery of dues in cases where the loan
amount is Rs. 10 lakhs and above.

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