What is this NPA stuff?
The crucial factor which decides a bank's profitability is the level of Non-Performing Assets or NPA. NPAs are the loans on which the borrower defaults or delays interest / principal payments. The banks have to recognise such loans faster and classify them as problem assets. The ratio of NPAs to the loans and advances made by Indian banks is very high compared to the banking systems in advanced countries. Banks cannot book any income from NPAs. Further, they have to make provisions for the NPA on their books, i.e. keep money aside in case they can't collect it from the borrower. All this impacts profitability adversely.
How are NPAs classified?
RBI guidelines require the bank loans to be classified as performing and non-performing for income recognition and provisioning purposes. The criteria for classification are :
Performing / Standard Assets: Loan assets on which interest and principal are received regularly. Standard assets also include those loans where the arrears are received within 180 days of the end of a financial year. No provisioning is required for such loans.
Non-Performing Assets: Any loan repayment delayed beyond 180 days has to be identified as an NPA. NPAs are further sub-classified into sub-standard, doubtful and loss assets:
Sub-Standard Assets: Sub-standard assets are those which have been non-performing for a maximum of 2 years. Also, where the loan repayment is rescheduled, the banks recognise these loans as sub-standard at least for one year.
Doubtful Assets: Loans which have been non-performing for more than 2 years and which are not considered as loss assets. A major portion relates to `sick' companies referred to the Board for Industrial and Financial Reconstruction (BIFR) which awaits the finalisation of rehabilitation packages.
Loss Assets: A loss asset is one where the loss has been identified but the amount has not been written off wholly or partly. Put otherwise, such an asset is considered not recoverable. There may be some salvage value in some cases.
How do the banks provide for NPAs?
The RBI has laid down provisioning norms for NPAs i.e. the banks need to keep aside funds to safeguard against any losses on such loans. The banks have to set aside 10 % of sub-standard assets as provisions. The provisioning for doubtful assets is 20 % and for loss assets it is 100 %.
I have heard about Evergreening or Rescheduling of loans. What's that?
Sometimes, to avoid classifying loans as NPAs, banks give another loan to the borrower so that it can repay the dues on the original loan. While the bank can project a healthy image in this way, it actually worsens the problem and creates more NPAs in the long run.
How to solve the NPA problem? What are the banks doing?
The banks need to have better credit appraisal systems so as to prevent NPAs. However, once NPAs occur, the problem can be solved only if there is enabling legal structure, since recovery requires litigation to recover such loans. With the long-winded litigation in India, debt recovery takes very long.