Limitations of NPA

1. Poor Credit Risk Management: Poor credit risk management is one of the main reasons for the rise of non-performing assets. Banks and financial institutions need to effectively assess and monitor the credit risk of their customers in order to avoid non-performing assets.

2. Economic Slowdown: Poor economic conditions of customers can affect their ability to repay their debts, which leads to non-performing assets.

3. Regulatory Changes: Regulatory changes in the market can affect the ability of customers to repay their debts, which leads to non-performing assets.

4. Interest Rates: Charging high-interest rates can lead to non-performing assets as debtors may be unable to meet repayment terms in case of high interest rates.

5. Fraud: Fraudulent activities can also result in non-performing assets. Banks and other financial institutions need to effectively monitor and detect fraud and should perform due diligence before advancing any loan to any lender.

NPA: Full Form, Types, Impact and Examples

Similar Reads

What is NPA?

NPA is defined as the amount of loan or advance the repayment of which has been overdue for more than 90 days. Banks tend to lend money to the borrower, and the borrower is obligated to pay the pre-specified amount of interest along with the repayment of the principal amount. Non-performing assets are always seen as a risk to the bank and institutions, as they do not generate any income and can lead to losses. They are categorised into three types viz. substandard, Doubtful, or loss assets....

Full form of NPA

NPA stands for Non-Performing Asset. An asset is considered a NPA when the loans or advances have not been repaid by the borrower for at least 90 days. In other words, NPAs are loans that do not generate any income for the bank/financial institution because the borrower has failed to make payments of both the principal and interest of the loan, as per the loan schedule, hence they are considered NPA because they are unlikely to become productive again....

Types of NPA

NPA’s are classified under three major heads, viz. Substandard, Doubtful and Loss assets. This recognition of assets is usually drafted after conducting inspections, assessments and audits of these assets in line with guidelines statutory and regulatory guidelines as issued by the Reserve Bank of India RBI)....

How NPA Works?

Loans are not classified as NPA category until a considerable period of non-payment has passed. Banks/ Financial institutions have to consider all of the factors that may make a borrower late in making interest and principal payments and extend a grace period or restructure the loan schedule. Once a period of a month or so gets passed after non-payment of loan instalments, banks usually consider a loan overdue. Until the end of the grace period which is typically 90 days in case of non-payment, than only the loan is classified as Non-Performing Asset (NPA). Banks have to take all legal steps and attempt to collect the outstanding debt before foreclosing loan, or the bank has to attach whatever property or asset has been used to secure the loan. Banks use the collateral to pay off the loan and foreclose the loan....

Example of NPA

Suppose Mr. X takes a loan of ₹1,00,000 from ABC bank on 15th Jan, 2023. Bank provided the scheme of paying ₹12,000 per month for the next 10 months, out of which ₹10,000 will be principal and ₹2000 will be interest. Installment will fall on every 15th day of the month. Mr. X serviced the first three instalments on time i.e. he paid the installment of 15th February, 15th March and 15th April. But later due to loss in business, he was unable to service the installment payment for the loan taken. So since, 15th May, he has failed to pay any instalment towards the loan. So once a period of 90 days has passed from the receipt of the last installment bank will consider this loan as a non-performing asset. Further, Mr. X loan will be categorised as follows:...

Impacts of NPA

I. Impact on Borrower...

How to Reduce NPA?

India has recorded a 10-year low of bad loans in the year 2023, which reveals that India is taking appropriate steps to reduce NPAs. There is a strict requirement to control NPA’s as they ultimately affect the economy and market at large. India has taken significant steps to eliminate the NPA and the process is progressing. Some of the ways India has adopted to reduce NPAs are as follows:...

Limitations of NPA

1. Poor Credit Risk Management: Poor credit risk management is one of the main reasons for the rise of non-performing assets. Banks and financial institutions need to effectively assess and monitor the credit risk of their customers in order to avoid non-performing assets....

Conclusion

Non-performing Asset refers to those loans or advances that have not been serviced by the borrower for at least 90 days. In other words, NPAs are loans that do not generate any form of income for the bank or financial institution because the borrower has failed to make payments on both the principal and interest of the loan. NPAs are a major concern for banks and financial institutions as they can impact their profitability and financial well-being. Non-performing assets are always seen as a risk to the bank and institutions, as they do not generate any income and can lead to losses. They are categorised into three types viz. substandard, Doubtful, or loss assets....