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The full form of NPA is Non-Performing Assets. As per the definition given by RBI, NPA is as any advance or loan that is overdue for over 90 days. When retail or corporate, customers are not able to pay the interest then the asset becomes “non-performing for the bank as it is not earning anything for the bank. Thus, RBI defines NPA as assets that cease to generate income for them.
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How Does NPA Work?
Bank or financial institution-issued loans or advances are called NPAs, they cease to bring any income for the lending institution as the borrower fails to make payments on the principal and interest of the loan for at least 90 days.
NPA is also known as the debt that has been past due and unpaid for a predetermined period.
When the ratio of the NPAs in the loan portfolio of a bank rises, its profitability and income fall, its capacity to lend falls and the possibility of loan defaults and write-off rise. To address the issue the RBI and the government of India introduced various policies and methods to manage and lower the amount of NPAs in the banking sector.
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What are the Types of NPA?
The following are the types of NPAs:
- Sub-Standard Assets – Sub-standard asset is an asset that remains as an NPA for a period equal to or less than 12 months
- Doubtful Assets – A doubtful asset is an asset that remains as an NPA for over 12 months
- Loss Assets – An asset is categorised as a loss asset when it is “uncollectible” or has such little value that its continuity as a bankable asset is not suggested. However, there may be some recovery value left in it as the asset has not been written in parts or as a whole.
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