A loan or advance in default or arrears because the principal or interest payment is 90 days past due is referred to as a non-performing asset (NPA). An asset stops producing income for the bank when it becomes non-performing, according to a 2007 circular from the RBI.

Assets are typically any valuable resources that may be sold and turned into money. They either bring in money or provide some other kind of advantage to people, businesses, and governments. However, for banks, any financial instruments that are their property or that the borrower owns are considered assets.

For instance, loans will be seen as assets when borrowers pay interest to the banks. When a borrower defaults on a loan or does not pay back the money, the asset for the lender or banks is no longer performing since it does not provide any revenue.

Non-Performing Assets: RBI’s Definition

The Reserve Bank of India (RBI) states that when an asset, especially one that is leased, stops bringing in money for the bank, it is considered to be non-performing. Any loan or advance over 90 days past due will be deemed a non-performing asset (NPA). As a result, any advances or loans in default or arrears will be classified as non-performing assets (NPA).

NPA was described as a credit facility for which interest and/or a principal instalment have been “past due” for a predetermined time. Therefore, if payment isn’t received from the lender within 30 days, the debt is considered “past due.”

For instance, if a debtor defaults on their loan payments, the lender will deem the contract void and the asset non-performing. However, the RBI abandoned the “Past Due” idea on March 31, 2001.

NPA will then be an advance in cases where:

• For a term loan, interest and/or a principal instalment overdue for more than 180 days.
• In relation to an Overdraft/Cash Credit, the account remains “out of order” for more than 180 days.
• In the instance of bills that have been bought and discounted, the bill is still past due after more than 180 days have passed.
• When an advance is given for agricultural purposes, interest and/or a principal instalment are overdue for two harvest seasons but not more than two and a half years.
• Any amount owing that has been past due for more than 180 days concerning other accounts.

The RBI has adopted the 90 days past due standard to ensure transparency and global best practices. NPA, in this case, refers to a loan or advance in which:

• When a term loan’s interest or principal instalment is past due for a period of more than 90 days,
• When an overdraft or cash credit lingers on the account for longer than 90 days, it is considered “out of order.”
• In the instance of bills that have been bought and discounted, the bill is still past due after more than 90 days have passed.
• For an advance given for agricultural purposes, the interest and/or instalment of principal is past due for two harvest seasons but for a maximum of two and a half years.
• Any amount owing that has been past due for more than 90 days in relation to other accounts.

Following the first phase of economic liberalization in 1991, the banking sector underwent a radical transformation. Asset quality wasn’t a top concern in the Indian banking sector before implementing prudential norms as per the recommendation of Narasimham Committee I and the government’s approval thereto. Instead, the sector was primarily focused on performance goals like opening large networks/branches, developing rural areas, focusing on priority sector lending, increasing employment generation, etc.

Although lending is one of a bank’s main duties, recently, they have become more cautious. Growing non-performing assets NPAs, which have become one of the main worries, are the cause. Loans, advances, and investments are the only types of NPAs.

An asset is classified as a performing asset as long as it produces the expected income and doesn’t disclose any unique risk other than typical commercial risk. When an asset fails to produce the anticipated revenue, it is referred to as an NPA.

What should we do next? The approach listed below could be used to help fix the issue.

Accountability

While important judgments are determined by the Credit Sanction Committee, which comprises senior-level executives, minor errors are frequently the responsibility of junior executives. Making senior executives responsible is crucial if PSBs are to deal with NPAs.

Corporate Governance

Despite the government establishing the Banks Board Bureau in April 2016 to entice talent, corporate governance hasn’t reached the anticipated level, and several concerns still require immediate attention.

Stricter NPA Recovery

Laws must be changed to provide banks additional authority to recover NPAs. Fear of losing the asset has led to discipline as a result of the Insolvency and Bankruptcy Code. The current situation permits the RBI to inspect a lender but does not provide them authority to establish an oversight committee due to debtor control modifications to the Banking Regulation Act. With regard to PSBs, the RBI has requested nine additional powers under the Banking Regulation Act, including the right to appoint and dismiss CMDs, the authority to replace the Board of Directors, the right to apply for the winding up of errant banks, the right to approve voluntary amalgamation plans, and others.

Credit Risk Management

The project’s creditworthiness, the clients’ creditworthiness, expertise, and experience should all be adequately evaluated. Banks should undertake sensitivity analyses and create safeguards against outside factors in addition to these evaluations. A strong management information system (MIS) must be implemented to track project early warning signs. Ideal scenario: The MIS should identify problems and promptly notify management to take appropriate action.

Asset Reconstruction Company

To expedite the settlement of stressed assets of PSBs, an ARC or asset management company needs to be established. After carefully considering the pricing and capital challenges, the government should start taking the necessary actions to investigate the viability. Fraud Management: Over the past three years, frauds in PSBs have increased in both quantity and value.

In FY18, there were 5,904 incidents of fraud involving more than Rs 1 lakh and a total of Rs 32,361 crore, compared to 4,693 cases in FY16 and a total of Rs 18,698 crore. The internal and external auditing systems of banks must be strengthened immediately. The financial sector has been struggling for a while now. The increase in NPAs is proving to be a significant obstacle. The banking sector also had substantial NPAs three decades ago, at a rate of 24%.