Non-Performing Assets (NPA) - Meaning

Non-Performing Assets are popularly known NPA. Commercial Banksassets are of various types.

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All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called asNon-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.

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India and Non-Performing Assets

In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross nonperforming assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%.

Types of NPA

NPA have been divided or classified into following four types:1. Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets.

2. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets. 3. Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. 4. Loss Assets : All those assets which cannot be recovered are called as Loss Assets. These assets can be identified by the Central Bank or by the Auditors.

Provision on types of assets

Provision is allocating money every year to meet possible future loss.

Causes of NPA

NPA arises due to a number of factors or causes like:1. Speculation : Investing in high risk assets to earn high income. 2. Default : Willful default by the borrowers. 3. Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. 4. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business. 5. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies. 6. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc

Measures to Solve Problems of NPA

The problems of NPA have been receiving greater attention since 1991 in India. The Narasimham Committee recommended a number of steps to reduce NPA. In the 1990's the Government of India (GOI) introduced a number of reforms to deals with the problems of NPA.

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Major steps taken to solve the problems of Non-Performing Assets in India :-

1. Debt Recovery Tribunals (DRTs)

Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India).

2. Securitisation Act 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. According to the provisions

of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.

3. Lok Adalats

Lok Adalats have been found suitable 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 nonsuit filed are covered. Lok Adalats avoid the legal process. The Public Sector Banks had recovered Rs. 40 Crores by September 2001.

4. Compromise Settlement

Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. Compromise Settlement Scheme is applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and

DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded.

5. Credit Information Bureau

A good information system is required to prevent loans from turning into a NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions