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What are NPA in Banking and Types

In the banking field, NPA( Non-performing Assets) is very important. If you have an interview in a bank, the first question will be asked ” The importance of NPA in banking”. So we will discuss the definition of NPA as a credit facility which the interest of installment of finance. it is used by financial institutions.

Types of NPA

Standard assets they generate regular income to the bank. banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector. The asset exhibits no problem in the normal course other than the usual business risk.

Sub-standard assets overdue for a period of more than 90 days but less than 12 months. the terms and conditions pertaining to the loan account are re-negotiated or revised. Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

Doubtful assets overdue for a period of more than 12 months. The collection of such kind of advances is highly questionable and there is the least probability that the loan amount can be recovered from the party. Such kind of advances put the bank liquidity and reputation at jeopardy

Loss assets Assets which are doubtful and considered as non-recoverable by bank, internal or external auditor or central bank inspectors. the loan has been identified either by the bank itself or an external auditor or internal auditor that the loan amount collection is not possible, and a bank has to take a dent in its balance sheet. 

CONS OF NPA in banking

  •  Funds of banks and financial institutions get blocked and are not available for further lending.
  • NPAs do not generate interest income. Hence Profit comes down.
  • High levels of NPAs affect the image and prestige of banks and financial institutions.
  • Provisions have to be made on NPAs, which again eats away the profits of banks.
  • Profitability gets reduced on account of provisions and non-debiting of interest.
  • The balance sheet of banks and financial institutions wear an unpleasant look due to stressed assets reflected in the balance sheet.
  • Higher levels of NPAs indicate rather weak management, which is not able to recover the loan dues.
  • Carrying NPA in the books of accounts increases administrative, legal and recovery costs.
  • Subsequent public issue offerings of banks and financial institutions will be adversely affected.
  • Suppliers, who were hitherto supplying goods and materials on credit, will henceforth demand cash.
  • Stakeholders will be disappointed and upset as they will get fewer percentages of profit on their shares.
  • It also implies that bank management is not taking any effective steps to recover loan dues.
  • Certain autonomy given by RBI will not be available for those banks whose NPA levels are high.
  • The cost of poor quality loans is transferred to other bank customers by charging a higher rate of interest.

Pros OF NPA in banking

  • The initiative will strike fear in the hearts of promoters from defaulting as they might end up losing their companies. Such promoters might start bringing in funds from their other ventures to keep this company from slipping away.
  •  Banks will be able to clean up their books rapidly and still hold on to the asset. Banks will move the company from their lending books as loans get converted to equity. Such conversion has also been exempted from the calculation of capital market exposure and will not attract mark-to-market provisioning.
  • Change in ownership will help banks recover their money fast if the change in management brings in the desired results.
  • RBI, through this announcement, has made it clear on how the company will be valued. Since most of these companies are sick and do not have any net worth; valuation was a tricky issue. RBI said that the conversion of debt to equity will be at fair value and should not exceed the lowest of ‘market value’ or break-up’ value.
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