A non-performing asset (NPA) is a line of credit where the interest and/or principal installment of the bond financing has remained “overdue” for a specified period of time. NPA is a term used by financial institutions for loans at risk of default. Once the borrower has not made interest or principal payments for 90 days, the loan is considered a non-performing asset of the lender. Impaired assets are worrisome for financial institutions as they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in NPAs and often results in massive devaluations. Say no to plagiarism. Get a tailor-made essay on 'Why Violent Video Games Shouldn't Be Banned'? Get an original essay Keeping in mind international best practices and ensuring greater transparency, it has been decided to adopt the “90 days delay” norm for identification of NPAs, from the year ending 31 March 2004. Accordingly, starting from 31 March 2004, a non-performing asset (NPA) is a loan or advance where: The interest and/or principal installment remains overdue for a period of more than 91 days in respect of a term loan, The account remains “out of service” for a period of more than 90 days, in relation to a Cash Overdraft/Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of purchased and discounted bills, interest and/or principal installment remains overdue for two cropping seasons but for a period not exceeding two half-years in the case of an advance granted for agricultural purposes, and any amount received remains overdue for a period exceeding 90 days compared to other accounts. Failure to submit bank statements for 3 continuous quarters in case of cash credit. No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91 days. Types of NPA: The following points highlight the seven major types of non-performing assets. The types are: Term Loans Cash Credit and Overdrafts Agricultural Advances Exempt Assets Advances under Rehabilitation Packages Takeaway Financing Advances covered by DICGC/ECGC Guarantees. Term Loans: A term loan will be treated as NPA for the year ending 31 March 1998 and thereafter if the interest or principal installment remains overdue for a period exceeding 90 days. Cash Credit and Overdrafts: A cash credit and overdraft account will be treated as NPA if the account remains out of service for a period of more than 90 days. An account is considered “out of service” if any of the following conditions are met: (a) The outstanding balance consistently remains above the fines/during power limit. (b) Although the outstanding balance is less than the sanctioned limit/drawing power:(1) There are no credits continuing for more than 90 days as of the balance sheet date; or (2) Credits during the foregoing period are insufficient to cover interest charged during the same period for more than 90 days. (c) Also any amount due to the Bank under any expired credit facility if it is not paid on the due date fixed by the Bank. Agricultural Advances: With effect from 30 September 2004, advances granted for agricultural purposes become NPAs if the interest and/or principal installment remains overdue for two cropping seasons in case of short-duration crops and a loan granted for a long tenure crops will be treated as NPA, if the principal or interest installment remains overdue for a crop season. Crops with a harvest season of more than one year, i.e. until the harvest period, the crops will be defined as"long duration" crops and other crops will be treated as "short duration" crops. These NPA names would also be applicable to agricultural term loans. In respect of other agricultural loans and term loans extended to non-farmers, identification of NPAs would be done on the basis of non-agricultural advances which are, currently, 90 days overdue. norm.Exempt Activities:Certain categories of advances have been exempted from being treated as non-performing for the purposes of determining income and/or provisions, even if they meet the above criteria. In short, they are as follows: Advances secured by term deposits. National Savings Certificates, Vikas Patras, Kisan Vikas Patras and Surrender Value of Life Insurance Policies. Advances guaranteed by Government of India and/or State Governments. But this exemption is only for the purpose of asset classification and provision rules and not for the purpose of income recognition. This means that property-related income will not be recognized until it is actually received. Furthermore, in the case of state guarantees, this exemption is only available if the guarantees have not been invoked. State government guaranteed accounts which have been invoked at the time of becoming NPAs need to be treated at par with other advances for the purpose of asset classification, income recognition and provision norms. Advances under Rehabilitation Packages: When additional facilities are given to a unit under rehabilitation packages approved by the Board for Industrial and Financial Reconstruction (BIFR) or Term Loan Institutions or Bank (by alone or in a consortium), the quotas relating to existing credits should continue to be foreseen. As regards additional concessions, it is not necessary to provide for a period of one year from the date of disbursement the additional concessions sanctioned within the rehabilitation packages approved by the BIFR/Term Credit Institution. Likewise, it is not necessary to provide a year for additional facilities granted to a sick small industrial unit under a rehabilitation package/nursing program developed by the bank itself or under a consortium scheme. After the expiry of one year, the bank in consultation with its auditors would assess whether it is necessary to make provisions in relation to the additional facilities sanctioned. Takeaway Financing: In case of takeaway financing, if based on recovery posting, the account is classified by the lending bank as NPA should make provisions for loan losses as per the guidelines. The provision should be reversed when the account is taken over by the successor institution. Upon taking over the account, the incoming institution should make arrangements as per the guidelines. Advances covered by DICGC/ECGC guarantees: In the case of advances guaranteed by the Expert Credit Guarantee Corporation (ECGC) or the Deposit Insurance and Credit Guarantee Corporation (DICGC), a provision must be made only for the balance in excess of the amount guaranteed by these companies. Income Recognition: Income from non-performing assets (NPAs) is not recognized on an accrual basis but is recorded as income only when it is actually received. Therefore, banks should not charge and book income account interest on any NPA. This will also apply to government-backed accounts. However, interest on advances on term deposits, National Savings Certificates (NSC), Indira Vikas Patras (IVP), Kisan Vikas Patras (KVP) and life insurance policies may be charged on theincome account on the maturity date, provided that adequate margin is available in the accounts. .Fees received by banks following renegotiations or renegotiations of outstanding debts should be recognized on an accrual basis over the period of time covered by the renegotiated or rescheduled credit extension. Income Reversal: If any advance, including purchased and discounted bills, becomes NPA, the entire interest accrued and credited to the income account in the past periods, reversed if the same is not realised. This will also apply to government-backed accounts. In respect of NPAs, accrued fees, commissions and similar income should cease to accrue in the current period and should be written off from previous periods, if not collected. Leased Assets: The finance charge component of finance income [as defined in “AS 19 Leasing” issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and has been credited to the income statement before the asset became impaired and, remaining unrealized, had to be written off or set aside in the current accounting period. Recovery allocation in NPAs: Interest earned on NPAs can be accounted for in the income account provided that the credits in the interest accounts do not arise from new additional credit facilities extended to the borrower concerned. The categories of NPA Impaired assets can be classified into three categories based on the period of permanence of the non-performing asset and the recovery of the dues: Stranded assets As of 31 March 2005, a stranded asset would be one which has remained as a non-performing asset suffering for a shorter period greater than or equal to 12 months. Substandard assets have credit weaknesses that jeopardize debt settlement and there is also the possibility of incurring and sustaining some losses if the deficiencies are not corrected. Doubtful Assets As of March 31, 2005, an asset is classified as doubtful if it remained as a sub-standard asset for a period of 12 months. A loan classified in the doubtful category presents all the characteristics of weakness defined for problem assets; further added characteristics that weakness makes liquidation or collection complete, based on currently known conditions, facts and values ​​which are highly doubtful and questionable. Loss-making Assets A loss-making asset is one where the loss has been identified by the bank's internal auditors and external auditors of the RBI, but the amount has not been fully written down. These types of assets are also considered to be bad and of little value such that their continuation or maintenance as a bankable asset is not guaranteed or acceptable although there may be some salvage or salvage value. Substandard asset* NPA remaining for a period of not less than or equal to one year.*In such cases, the current net worth of the borrower or guarantor or the market value of the security charged is not sufficient to ensure recovery of the bank's dues; *Likely will incur some losses if deficiencies are not corrected.* 15% of the sum of the net investment in the lease and the unrealized portion of the finance income net of the finance charge component.*Additional 10% for lease exposure unsecured, i.e. 25% total.Dubious assets*Remained in sub-standard category for over 1 year;*Recovery - highly questionable and unlikely.*100% of financing not secured by realizable value of leased asset.*Additional provision on part unrealized financial income net of the financial expense component of the guaranteed part as in:.