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What is NPA?

by Uddipana Gogoi

NPA stands for non-performing assets. In simple terms, NPA refers to those assets that are not yielding return to the business. In other words, a nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in arrears. Thus, it indicates loans and advances of banks for which principal or interest payment remained due for 90 days or more. Although such assets are shown in the asset side of the balance sheet, there is not any return to the bank. The NPAs are classified as three categories-

  • Sub-standard assets
  • Doubtful assets
  • Loss assets

Classification of NPAs

  1. Sub-standard assets: A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. A sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months.
  1. Doubtful assets: A doubtful asset was one, which remained NPA for a period exceeding two years. Thus, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months.
  1. Loss assets: A loss asset is one which is identified as loss asset. The bank or internal or external auditors or the RBI inspection identifies such assets. But the amount has not been written off wholly.

NPA recovery mechanism in India

The mechanism recovery mechanism in India are –

  1. Lok adalats: It is the forum for mutual settlement of disputes and pending cases in the court law and pre-litigation stage.
  1. Debt recovery tribunal: It provides for speedy recovery of bad debts of commercial banks. Moreover, the DRT also has the power to decide upon the applications filed against the secured creditors by the borrower or mortgagor for the action taken by them under the Securitization Act.
  1. Sarfaesi Act: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 better known as the SARFAESI Act. Thus, it examines the reforms and changes in the banking and legal systems.
  1. Insolvency And Bankruptcy Code (IBC): Before the Insolvency and Bankruptcy Code, 2016 came into force there were multiple laws and institutions. The IBC has made a provision for the formation of the Insolvency and Bankruptcy Board of India. It is responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The IBC also makes provisions to make a formal Insolvency Resolution Process (IRP).
  1. Bad bank: Bad bank is a corporate entity that was formed to clear the non performing assets of banks. It consists of two entities- Asset Reconstruction Company Limited (ARCL) and India Debt reconstruction Company Ltd. (IDRCL). The ARCL takes over the bad loans of commercial banks in a 15:85 ratio.

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