What are the Non-Performing Assets of Bank

Banks are the backbone of any economy. They provide loans to individuals, businesses, and governments to help fuel economic growth. But what happens when borrowers stop repaying those loans? That’s when a loan can turn into  Non-Performing Assets (NPA).

In this article, we’ll break down what non-performing assets in a bank actually mean, how they are classified, the types of NPAs, and what happens if your account goes NPA — all in a way that’s easy to understand.

Non-Performing Assets of Bank

Simply put, non-performing assets of a bank are loans or advances given by a bank that stop generating income. Normally, when a bank gives out a loan, it expects to receive regular interest payments along with the repayment of the principal amount. If a borrower fails to make interest or principal payments for 90 days or more, the asset is classified as “non-performing.”

Understand NPA With an Example

Let’s say a bank gives a personal loan to Raj of ₹2 lakh, and the EMI is due every month. If Raj doesn’t pay any EMI for three straight months (i.e., 90 days), that loan becomes a Non-Performing Asset. From that point, the bank stops earning from that loan — it becomes a liability rather than an asset.

Non-Performing Assets Classification

Not all NPAs are the same. The non-performing assets classification helps banks understand the seriousness of the situation. NPAs are usually classified into the following categories:

1. Substandard Assets

Meaning: These are loans or advances that have become non-performing for less than or equal to 12 months.

Why it matters: It’s the first stage of a bad loan. The bank still has hope that the borrower might repay soon.

Example: If a borrower misses payments for 4 or 8 months, that loan is marked as a substandard asset.

2. Doubtful Assets

Meaning: If a loan remains in the substandard category for more than 12 months, it becomes a doubtful asset.

Why it matters: Now the bank starts to doubt whether the money will ever come back.

Example: A loan unpaid for 18 or 24 months falls into this category.

3. Loss Assets

Meaning: These are loans where the bank or its auditor has identified that the money is not recoverable, but the loan has not yet been written off completely from the books.

Why it matters: It’s the worst-case scenario — the bank has accepted that the loan is a loss.

Example: Suppose the borrower has vanished, and even the collateral (like a house or property) has no value. The bank calls it a “loss asset”.

Non-Performing Assets Types

There are mainly four non-performing assets types that banks deal with:

1. Term Loans

Term loans are loans granted for a fixed period (usually medium to long term) with regular repayment schedules, either monthly, quarterly, or yearly.

When Do They Become NPAs?

• A term loan becomes a non-performing asset if the borrower fails to make any principal or interest payment for more than 90 days.
• For example, if a borrower misses three consecutive monthly payments, the loan is classified as an NPA.

Why It Matters

Term loans are generally used for capital expenditures such as buying machinery, vehicles, or property. Non-payment affects the bank’s cash flow and may indicate financial stress for the borrower.

2. Overdraft and Cash Credit Accounts

• Overdraft (OD): A facility allowing customers to withdraw more than their account balance up to a certain limit.
• Cash Credit (CC): A short-term loan facility where the borrower can withdraw money up to a sanctioned limit, usually against inventory or receivables.

When Do They Become NPAs?

• These accounts become NPAs if no transactions (debit or credit) are recorded for 90 days or more.
• In other words, if the borrower stops using the facility and does not repay the outstanding amount or operate the account for 90 days, it is classified as non-performing.

Why It Matters

These are working capital loans meant to support day-to-day business operations. Non-operation or non-repayment signals liquidity problems for the borrower.

3. Bills Purchased and Discounted

• These are short-term credit facilities where banks purchase bills of exchange or promissory notes from customers before maturity at a discount.
• The customer gets immediate funds, and the bank collects payment from the bill’s drawee on maturity.

When Do They Become NPAs?

• If the bills remain unpaid for more than 90 days past the due date, they are classified as NPAs.
• This means the bank has not received the expected payment from the party responsible for settling the bill.

Why It Matters

Bills purchased and discounted are crucial for trade finance. Non-payment disrupts the bank’s liquidity and can indicate problems in the borrower’s business or the drawee’s creditworthiness.

4. Agricultural Advances

• Loans extended to farmers for agricultural activities such as crop production, purchase of seeds, fertilizers, equipment, etc.
• These advances are usually short-term and linked to crop cycles.

When Do They Become NPAs?

• For short duration crops, if the principal or interest is not paid for two crop seasons, the loan is classified as an NPA.
• For long duration crops, non-payment for one crop season leads to classification as an NPA.
• Crop seasons vary depending on the type of crop and region.

Why It Matters

Agricultural advances are vital for rural economies. Delays or defaults often arise due to factors like poor harvests, weather conditions, or market prices, affecting both farmers and banks.

What Happens If My Account Goes to NPA?

This is a concern for many borrowers. What happens if my account goes NPA?

Here’s what you need to know:

• Credit Score Drops: A big red flag for future loans. 
• Recovery Notices: The bank may begin the recovery process. 
• Legal Action: The bank can take legal steps to recover dues, including auctioning any collateral. 
• No Fresh Loans: You may be barred from getting loans or credit cards in the future.
  

It’s always better to talk to your bank and work out a repayment plan before things go this far.

Provision for Non-Performing Assets

When loans turn into NPAs, banks don’t just sit idle. They are required to set aside a certain amount of money as provision for non-performing assets. This means a part of their profit is kept aside to cover potential losses from these bad loans.

These provisions impact the bank’s profitability but help ensure the bank remains financially healthy even if many loans go bad.

Conclusion

Understanding what non-performing assets of a bank is important not just for bankers, but also for borrowers. When loans turn into NPAs, it’s a warning sign — both for the bank and the borrower.

By understanding non-performing assets classification, knowing the types, and being aware of the provision for non-performing assets, borrowers can take proactive steps to avoid falling into the NPA category. If your account is heading in that direction, don’t wait — contact your bank and seek help.

Staying informed is the first step towards staying financially safe.

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