NPA Classification

NPA Classification

Tags:      Gig Economy     Economy     WTO     WTO Public Stockholding     MSP     Economic Growth     Masala Bond     Environmental Performance Index     Forecast of Economic Growth     Functions of the Finance Commission

Non-performing Assets (NPA) as per RBI is an asset that ceases to generate regular income for the bank due to the borrower's inability to repay the principal and interest amount within a specified time frame. The menace of NPAs has become a recurring concern for banks, impacting their financial stability and overall health. To comprehend the intricacies of NPAs, it is essential to delve into their classification, as well as discern the fundamental distinction between performing and non-performing assets.

The classification of Non-performing Assets (NPA) can be done into three categories based on the duration of non-payment: Substandard Assets, Doubtful Assets, and Loss Assets. Substandard Assets are those with overdue payments of more than 90 days. While they may have the potential to recover, they carry an increased risk of default. Doubtful Assets, on the other hand, have remained in the substandard category for 12 months. These assets have a higher probability of turning into a loss for the bank. Loss Assets are those where the bank has identified an irrecoverable loss, whether partially or entirely, but has not written off the asset completely.

There is a difference between performing and nonperforming assets. Performing assets are loans or advances where the borrower meets their financial obligations regularly, ensuring timely repayment of both principal and interest. These assets contribute positively to a bank's profitability and liquidity. In contrast, non-performing assets encompass loans where the borrower has failed to make timely payments of both principal and interest, leading to deterioration in the bank's financial health. Performing assets reflect a strong and vibrant economy. They signify trust and reliability, fostering an environment of mutual growth for both the borrower and the lender. On the other hand, non-performing assets indicate financial distress, both on an individual and systemic level.

The presence of bank Non-performing Asset (NPA) poses multifaceted challenges for banks. Firstly, they lead to erosion of profitability and capital adequacy. Moreover, excessive provisioning erodes a bank's capital base, limiting its capacity to lend. Secondly, NPAs weaken the overall asset quality, raising concerns among stakeholders and affecting credit ratings. This, in turn, restricts banks' ability to raise funds from the market. Thirdly, NPAs increase the cost of borrowing for banks, as the risk associated with lending rises. Consequently, this hampers the transmission of monetary policy measures by the central bank.