Posted in Finance, Accounting and Economics Terms, Total Reads: 354
Definition: Non Performing Assets (NPA)
A loan or a credit facility is termed as a non-performing asset when the interest payment or the principal repayment is long overdue. They are in danger of defaulting. If the interest or principal payment is delayed by more than 90 days the loan is considered as a NPA. Banks are the bank bone of the economy and they constantly strive to keep the NPA to the minimum. Large number of NPA can lead to credit crunch and loss in credibility of the institution. As interest payments are a large source of income for the banks, non repayment can lead to write off, decrease in confidence by depositors and ultimately to Bank Run. Downturn in the economy can lead to an increase in NPA.
Some of the criteria before declaring an asset as NPA are :
1. Interest or principal repayment is over due by more than 90 days.
2. Bills over due for more than 90 days.
3. Any payment over due by more than 90 days.
NPA can be further classified as sub standard assets, doubtful assets and loss assets. A substandard asset is one which has been declared as NPA for a period of not more than 12 months. Doubtful assets is one which has been deemed as NPA for more than 12 months and loss assets are identified by auditors and are partially or wholly written off. They are termed as loss assets when the chances of recovering them are minimal.
At the time of boom the banks provide easy liquidity. However if the economic conditions turns unfavourable, recovery becomes difficult. Further weak credit policy and financial crisis can increase the number of NPA.
NPA adversely affects the shareholders and the depositors. Also the economy as a whole suffers due to poor management of resources.