Full Form of NPA

Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is the Full Form of NPA?

The full form of NPA is Non-Performing Assets. It is a classified asset used for differentiating loans and advances on which principal and/or interest is overdue, i.e., payments are in default/ arrears and generally per set standards by regulatory authorities. The assets are considered NPA, where no recovery has been done within the last 90 days.

Types

Types of NPA

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#1 – Standard Assets

These are NPA, which remained overdue for more than 90 days but less than 12 months. These assets bear the nominal risk as the borrower fails to make payments regularly or on time.

#2 – Sub Standard Assets

These are NPA, which are overdue for more than 12 months, these loans have more risk, and the borrow has weak creditworthinessCreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new loan.read more. So, banks create a haircut to such NPA as there is a risk of non-payment.

#3 – Doubtful Debts

These are Non Performing AssetsNon Performing AssetsNon-Performing Assets (NPA) refers to the classification of loans and advances on a lender's records (usually banks) that have not received interest or principal payments and are considered "past due." In the majority of cases, debt has been classified as non-performing assets (NPAs) when loan payments have been outstanding for more than 90 days.read more,overdue for more than 18 months, banks having a danger of recovery, and are known as doubtful debts. Such NPA affects bank creditworthiness as more of them could put the bank at risk.

#4 – Loss Assets

It is the last classification of NPA as under these, the loan amount is classified as non-recoverable by the bank itself. Therefore, the bank can either write off the outstanding amount or make provision for the full amount, which will be written off in the future.

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How NPA Works?

NPA are normal loans and advances, but non-recovery, usually 90 days, is categorized as NPA after a prolonged time. After the specified period and giving prior notice to the borrower, the lender has the right to force the borrower to sell the asset pledged against the loan and realize proceedings for recovery. Still, if no asset is pledged, the lender has to write offWrite OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more/advance as bad debtsBad DebtsBad Debts can be described as unforeseen loss incurred by a business organization on account of non-fulfillment of agreed terms and conditions on account of sale of goods or services or repayment of any loan or other obligation.read more and will align it with the collection agency at a discounted rate. A loan can be classified as NPA at any point during the tenure of the loan. As a result, it is placed on the financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more, balance sheet, negatively impacting their image.

Example

Justin Inc. borrowed $100 million from a loan company and paid $200,000 monthly. But due to some reasons, the company couldn’t pay the installments for three consecutive months. As a result, the lending company will be forced to classify this loan as a non-performing asset to meet the legal requirements.

Impact

The problem of NPA is alarming nowadays in our banking system. The most important is the NPA. The least is the confidence of depositors, lenders, or investors. It makes credit availability difficult and disrupts the institution’s image. The following are some major impacts:

How to Reduce NPA – Indian Example

NPA Indian Exampels

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#1 – SARFAESI Act 2002 – This act gives the power to the bank to deal with NPA without the involvement of the courts. It gives the bank right to:

  • Asset reconstruction
  • Securitization
  • Enforcement of security

#2 – Debt Recovery Tribunal – In 1993 Indian Parliament Act brought DRT into existence, which empowers banks to recover loans of ₹10 lakh and above.

#3 – Lok Adalats – This mechanism can recover small loans up to ₹5 lakhs per the guidelines of RBI.

#4 – Compromise Settlement – Used to settle loans up to ₹10 crore amounts where the borrower experiences genuine difficulties repaying the amount under this method, the proportionate amount recovers from the borrower.

#5 – Credit Information Bureau – Third-party agencies such as CIBIL keep the record of the defaulters and the financial health of the borrowers. Banks may seek the help of such agencies before lending money to them.

Limitations

NPA is the most important tool to determine any bank or financial institution’s soundness, performance, and health. The more the NPA, the lower the performance of other banks or institutions, and the less the bank is creditworthy. It creates a negative effect on the goodwillThe GoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more of a bank, and this can be judged only by total NPA. So it is a very important measure to be carried out. The mentioned below are some disadvantages:

Conclusion

Non-Performing Assets (NPA) are assets classified based on non-recovery of installments as per the agreed terms and conditions, usually classified after 90 days of non-recovery. They are further classified as standard, sub-standard, doubtful, and lost assets. It harms the organization’s profitability, financial strength, capital adequacy, and public image. Various government organizations are set up under the parliament act or other statutes for monitoring the NPA of financial institutions, thereby reducing NPA and increasing the profitability of the organization and the economy as a whole.

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