Concept of NPA
An asset is classified as non-performing asset (NPA) if dues in the from of principal and insert are not paid by the borrower for a period of 180 days. However with effect from march 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances/credit facilities having performing status.
The Securitization Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002 defined Non performing Assets (NPAs) as ” an asset or account of a borrower,which has been classified by a bank or financial institution as sub-standard, doubtful or loss assets in accordance with the direction or guidelines relating to asset classification issued by the RBI’’.
As per Reserve Bank of india’s guidelines, income on lo0ans is to be recognized on receipt basis(as against accrual basis) and it has not been received for a specified period, the same asset is to be treated as non-performing.
Non-performing Assets in Banks
The assets side of commercial banks balance sheet in India contain generally the following items in the order mentioned below.
1. Cash in hand:
Balance with RBI:
- In current account.
- In other account.
2. Balance with banks and money at call and short notice.
Balance with banks:
- In current account.
- In other deposit account.
- Government securities.
- Other approved securities.
- Shares, debentures/bonds.
- Subsidiaries and /or joint ventures.
4. Advances (including bills):
- Bills purchaged.
- Cash credit, overdraft and loans payable on demand.
- Term loans.
- Agriculture advance.
5. Fixed Assets:
6. Other Assets:
- Inter-office adjustment.
- Interest on Investments not collected.
- Prepaid tax,rent,rates,security deposits.
- Suspense A/c (capital, revenue).
- Other unreal assets.
Of the above six categories of assets, two categories, items 3 and 4 investment and advances) may from 90% of the total assets of a bank.
Calculation of NPA
According to RBI directives, all banks are required to maintain NPAs both on gross and net basis. It is generally expressed in the percentage term. But banks were facing practical problems in classifying them under, hence RBI set-up an informal group to examine the problem faced by banks in classifying the assets. The informal group recommended to classify non-performing assets into two, Gross NPA AND Net NPA.
NPAs = [(Gross or Net NPAs / Total Advances]*100
Where, Net NPAs = Gross NPAs – provision for NPAs
The aforesaid definition suggests that the ratio is designated as ‘’non-performing assets to total assets ‘’but in reality it is worked out in case of credit only non performing credit is related to total credit.
The difference between Gross-NPA and Net-NPA is for Net-NPA is having provisions for bad debts. The Net-NPAs are obtained from Gross NPA after deduction
- Balance in interest suspense account, interest due but not received.
- Claims received from credit guarantors and kept in suspense account pending adjustment (for final settlement)
- Part payment received and kept in suspense account, and
- Total provision held on Trend progress of Banking in India.