Classification of NPA or, Non-Performing Assets

Classification of NPA or, Non-Performing Assets

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The NPA or, the non-performing assets (NPA) refer to any advance or loan that is more than 90 days past due is referred to as an NPA by the Reserve Bank of India. According to a 2007 circular from the RBI, "An asset ceases to be performing when it stops producing income for the bank." In order to be more in line with international standards, the RBI introduced the 90-day rule for identifying NPAs, which became effective for the fiscal year that concluded on March 31, 2004. Non-performing assets come in a variety of forms, depending on how long they have been NPAs.

What is an Asset?

Something possessed is referred to as an asset. The loan becomes the asset for the banks due to the interest paid on them. The asset for the bank becomes "non-performing" when customers, whether corporate or retail, are unable to pay the interest since it is not producing any income for the bank. NPAs are therefore defined by the RBI as assets that stop producing income for them.

Categories of NPA - Depending on how long they are classified as non-performing assets (NPAs), there are various sorts of NPAs.

a) Sub-Standard Assets - If an asset stays an NPA for less than or equal to 12 months, it is classified as a sub-standard asset.

b) Doubtful Assets - If an asset was an NPA for more than a year, it was categorised as a questionable asset.

c) Loss Assets - When an asset is "uncollectible" or has such little value that its continuation as a bankable asset is not recommended, it is seen as a loss asset. The asset has not been completely or partially written off, hence there may yet be some recovery value in it.

Provisioning of NPA

Putting aside the technical meaning, provisioning refers to the sum that banks set aside from their earnings or profits in a given quarter to cover non-performing assets—assets that could eventually result in losses. It is a technique used by banks to account for problematic assets and keep a clean ledger of transactions. Depending on which category the asset falls within, provisioning is carried out. In the section above, the categories were mentioned. In addition to asset type, provisioning has also been influenced by bank type. For instance, the provisioning standards for Tier-I banks and Tier-II banks differ. Banks are required to periodically report their NPA figures to the RBI as well as the general public. Two measures in particular aid in our understanding of a bank's NPA condition. In the bank's independent financial statements, NPA statistics are disclosed.

Gross Non-Performing Assets, or GNPA, is a financial term. GNPA is a precise sum. It provides information on the overall amount of gross non-performing assets held by the bank during a specific quarter or financial year, as applicable.

Net non-performing assets are referred to as NNPA. The bank's provisions are deducted from the total NPA to calculate NNPA. As a result, net NPA provides you with the precise value of non-performing assets following the bank's specific provisioning for them.

Ratios of NPAs - NPAs can also be stated as a proportion of total loans. It enables us to estimate the portion of the total advances that is not recoupable. The math is rather easy to understand: The ratio of all GNPA to all advancements is known as the GNPA ratio. The NNPA ratio calculates the ratio to the total advances using net NPA.