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  • Category: Banking

    What is NPA term related to banking system?

    Want to know about NPA, its details and method to tackle NPA related issues? Looking out for details here? On this page get advice from experts for all your queries.

    We often read or hear about a term called NPA related to the banking system.
    What is NPA and how is it calculated? What are the consequences of low NPA and high NPA? How does NPA affect the banking activities as a whole? What are the steps necessary to tackle NPA related issues?
  • #148787
    Banks have many activities. One of the major activity is to take money from us as FD or in savings / current account and give it or a part of it as loan to people or industry. The difference of interests or 'spread' as it is technically known is the income of the banks. However banks are earning through many other activities also.

    Now if a loan is defaulted by the loan taker either by not paying its interest or principal then it is termed as bad loan and the loan amount is called as non performing asset (NPA) in banking terminology.

    More precisely any default more then 90 days is added to existing NPA to arrive at the final figure.

    NPA increasing is a bad sign for any bank and affects its bottom line.

    Knowledge is power.

  • #148791
    Non-Performing Assets (NPA):
    The loans given to various parties are to be repaid as prescribed in the loan sanctioning document. Some people fail to repay the loan as decided. They may default or there may be arrears on scheduled payments. This nonpayment may be either principal, interest or booth.If their payments are default or due for more than 90 days these loans are classified as NPA. This period may depend on the terms and conditions of the loan sanction agreement.
    Example: If a company has taken a loan from a bank say around Rs.10.00.000/-. The monthly payment from the company to the bank, say around Rs.50,000/-. If the company has not paid that amount for a consecutive three months period then such loan can be classified as NPA.
    NPA ratio is the ratio between Value of NPAs / Value of total loans. If a bank has given 8 cr loans and NPAs are 1 Cr, the NPA ratio of that particular bank branch will be 1/8.=0.125. A higher ratio of NPA gives a negative impact on the bank. Their performance will be treated as bad.
    NPA will affect the banks in the following ways.
    1.The cash flow will come down.
    2. Reduces the capital identified for loans.
    3. The non paid loans will be written off against earnings. So the bank's earnings will come down.

    The recovery of these NPAs will be addressed normally as given below.
    1. If the company is not able to repay the loan as decided, as proactive measure the bank can reschedule the loan repayment so that the company will come out of problems and repay the amount.
    2. While sanctioning the loan if the company has given any collateral security, the bank can occupy those securities and sell them to recover the loan.
    3. The bad loans can be converted to equities.
    4. There are some Organisations who will purchase these bad debts and as they are specialised in such recovery actions they will recover the amounts. The bank can sell their bad debts to such companies. But these companies purchase these bad debts at a very low cost. So the recovery amount to the bank will be very less.

    always confident

  • #148803
    NPA is a Non Performing Asset. Businessmen take a loan from banks and use in business operation. Banks earn interest on these loans after business operate. Companies would have to repay loan with interest in timely installment whether profit or loss. When borrower fail to pay the EMI or installment on time then companies, businessmen and institutions loan account after 90 days considered as NPA. Loans considered as assets because these are generally big amounts. There are four types of Assets :
    1. Standard assets: It is a performing asset. There is low risk and does not required any special provision for standard asset. It generates continous incomes and repayments as and when they fall due.
    2. Non-standard assets : Loans and assets considered as non performing assets for a period of 12 months.
    3. Doubtful assets : All assets which are considered as non performing assets for period of more than 12 months.
    4. Loss assets : All those assets which cannot be recovered.
    Lets understand NPA calculations on the basis of examples:

    Suppose I deposit 1500 rupees to bank and this 1500 calculated as liability of bank. From the liability, 500Rs given to RBI and 1000 is the assets of the bank. Through these assets banks provide loan. Suppose expenses of maintanance for banks is 15Rs. Now suppose banks provide loan to 10 people from the assets by charge of 10% interest. For one people interest is 10Rs and for ten people interest is 100Rs. At the time of paying a loan one individual does not pay loan that means now assets is 90Rs for 9 people interest. Formula to calculate NPA is = Loss of asset/actual asset x 100= 100/1000x100= 10%. NPA is 10%. Bank did not get any profit because one does not pay loan. If 10 people pays then banks get profit of 25Rs.
    Bank interest income from loan = 100
    Expenses and interest on saving account= 15 + 60 =75Rs
    Profit income before= 100Rs - 75Rs= 25Rs
    Now interest is 90 because does not pay by one person.
    profit income after = 90-75= 15Rs.

  • #148996
    Any asset we posses has to 'perform'. Otherwise it becomes a dead asset. In banks the loans they give to the customers are the assets. The assets should bring regular return-mainly the interest- to say they are performing. Moreover if there is any repayment schedule, the repayment also should come regularly as per schedule.
    If in any such loan account (called by general term advances or whatever name or subcategory) if the interest is not serviced or paid on due date, or any instalment of repayment is not paid on its due date, and even within three months(90 days) then the loan or asset has to be treated as Non-performing asset.
    Such accounts has to be monitored specially and to be brought back to performing level as early as possible. The banks have to assess all such non-performing assets periodically(generally quarterly). Banks are mandated to earmark and keep separate as provision an amount equal to a stipulated percentage of the total NPAs as on particular date(say end of each quarter) as provision.

    Further, the banks cannot account further profit from the NPAs until the dues of interests and instalments are recovered in full. So a bank is affected in more ways by an NPA.

    1. They do not get any profit or income from NPAs.

    2. Banks have to take from their already earned profits and keep it aside as provision.

    3.Depending on the age of the NPAs , the banks have to keep provision almost hundred percent of the NPAs. That affects profitability and dividend to shareholders.

    4. NPAs are money blocked, and the banks do not get funds turned over for further lending. That will again affect their business and profitability.

    5. If NPAs go more than the accumulated profit, then they affect the capital itself and erode the capital base. It is to avoid such capital erosion that there is a stipulation of Capital Adequacy Ratio for banks.

    If a certain sum is to be lent, then a certain percentage of that is to be added to the capital. When profit flows regularly, this additional capital comes from profit. But with huge NPAs, the profit is less and banks have to find additional capital for further lending.
    The more the lending, the more capital adequacy amount is needed. As public sector banks owner is government, the government has to infuse capital. Had it been private, they should have taken i from shareholders as share issue (rights or preference). In any way NPAs affect the stakeholders directly or indirectly.

    However banks are supposed to monitor every account and take remedial action even when there is just first minor default. But due to the large number of accounts this is not done hundred percent effectively. Sometimes the borrowers go on promising and asking for some time but default ultimately. However the experience is that the high amount NPAs are the shockers and not the small ticket loans. It takes many thousand small loan accounts to make a single big borrower NPA.

    Banks and bank officials also are subject to various pressures and influences that they cannot take all the supposed measures against big ticket defaults. There are many legal hurdles and loopholes which are well exploited by the big defaulters. Above all, there is the political influence and name taking by the big borrowers.

    As the big loans immediately affect the bank's/branch's business, bank higher ups also lend more time to see if they are brought to performance.

    The more effective way to avoid NPA is to give business targets very realistically and not arbitrarily, announce and publish all big loans of public sector banks and their details to he knowledge of the public-either in balance sheets or as media announcements. The names and photos of the defaulters should be published.

    Apart from all these, there should be a change in our laws to make the directors personally responsible to all the liabilities of the company(which is not now). The state of things now is, director and company are different. Director's personal assets cannot be attached for the default or liability of a company, unless agreement is taken specifically for the purpose. Even then there can be disputes and directors can escape.
    Ironically in the case of a small proprietary firm, the firm and proprietor are one and same.
    The company director should be held responsible and punishable for the defaulted liabilities of a company. Then the big NPAs will come down.

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