By A.
MUQTHAR AHMED
CONCEPT OF
NON –PERFORMING ASSET
Evaluation of NPA Definition in India: A Non-Performing
Asset (NPA) is defined as a credit facility in respect of which the
interest and/or instalment of principal has remained”past due‟
for a specified period of time. With a view to moving towards
international best practices and to ensure greater transparency,
it was decided to adopt the ‘90 days’ overdue’ norm for
identification of NPA, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing
asset (NPA) is a loan or an advance where;
Interest and/or instalment of principal remain overdue for a
period of more than 91 days in respect of a term loan,
The account remains ‘out of order’ for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted,
Classification of Assets
a) Standard Asset
b) Sub-standard Assets
c) Doubtful Assets
d) Loss Assets
MPACT OF NPAS IN FINANCIAL
INSTITUTIONS
Continuous decline in interest income and providing making
provisions for bad debts to write off from current profits affect the
bank's profitability adversely.
Reduction of Return on Investment (ROI) .
Due to inclusion of NPA's, the computation of capital adequacy ratios
based on BASEL norms gets disturbed and cost of capital escalates.
Decline in the overall interest income of bank as it will be accounted
only on receipt basis.
Escalation of Cost of capital due to uncertainty in return, high risk and
high level of NPA's
The economic value addition (EVA) by banks gets disturbed due to
mismatch of assets and liabilities caused by NPA's.
High level of NPA's do not have its impact only on banking operation
but it adversely affects the other parties too.
NPA's misallocate credit from good projects so the non performing
loans epitomize bad investment and economy performs below its
production potential.
Impact of NPAs on Banking Operations
in India
The general interest income of banks will decline and
will be accounted only on receipt basis.
Due to decline in interest income banks profitability
get affected adversely because of the providing of
doubtful debts and consequent to writing it off as bad
debts.
Return on investments (ROI) gets reduced more than
NPAs.
The capital adequacy ratio gets disturbed due to
inclusion of NPAs into its calculation.
Due to uncertainty in return, high risk and NPAs the
cost of capital will go up.
Impact of NPA on Banking Industry
Asset (Credit) contraction.
Liability Management
Capital Adequacy
Shareholders’ confidence:
Public confidence
Impact on the National Economy
NPAs do not just reflect badly in a bank’s account books, they
adversely impact the national economy. Following are some of
the repercussions of NPAs:
Depositors do not get rightful returns and many times may lose
uninsured deposits. Banks may begin charging higher interest
rates on some products to compensate Non-performing loan
losses
Bank shareholders are adversely affected
Bad loans imply redirecting of funds from good projects to bad
ones. Hence, the economy suffers due to loss of good projects and
failure of bad investments.
When bank do not get loan repayment or interest payments,
liquidity problems may ensue.
CONCLUSION
The Non-Performing Assets have always created a big problem for the banks in India. It is just not only
problem for the banks but for the economy [Link] are an unavoidable burden for each banking
industry.
The success of banks depends upon methods of managing NPAs and keeping them within tolerance
level. The money locked up in NPAs has a direct impact on profitability of the bank as Indian banks
are highly dependent on income from interest on funds lent. The NPAs level of our banks is still high
as compared to the foreign banks. It is not at all possible to have zero NPAs.
The problem of recovery is not with small borrowers but with large borrowers and a strict policy
should be followed for solving this problem.
The government should also make more provisions for faster settlement of pending cases and also it
should reduce the mandatory lending to priority sector as this is the major problem creating area.
So the problem of NPA needs lots of serious efforts otherwise NPAs will keep killing the profitability of
banks which is not good for the growing Indian economy at all.
