The full form of NPA is Non-Performing Asset in the banking sector.
When a borrower fails to pay instalments or interest for 90 days or more, then a banker declares the loan as an NPA account. It means that the loan stopped generating profit for the bank and is marked for total recovery of the loan.
Loans are the highest profit-making products for the banks, but when a loan borrower defaults for 90 days or more, then banks enlist such loans as NPA, and move for the recovery of the entire loan, through the legal process.
Recovery of NPA
In cases of unsecured loans, they assign a recovery team, which contacts the borrower and tries to understand their current situation and will recover the loan accordingly.
Whereas, in secured loans, the legal process to recover the loan is more dominant. This legal process includes the taking of physical possession of the property’s mortgage, followed by the auction to recover the loan. But, this process will take some time as the bank needs to serve some notices under the SARFASI Act. All these notices provide some time for repayment, likely 60 days.
Impact of NPA
| On Banks: | On Borrowers: |
| Reduces profitability Affects Liquidity & Negative Balance Sheet Increases financial risk | Negative effect on credit score (CIBIL) Legal actions by banks Difficulty in getting loans in future |
How to Resolve NPA?
NPA Restructuring: The bank can restructure an NPA account by extending the repayment tenor and providing a moratorium period to reduce the financial pressure on the borrower. This offers an opportunity to convert the NPA account into a standard account again.
Assignment to ARC: Asset Reconstruction companies (ARC) are specially designed for reducing the NPA from the banks & other financial institutions. Their core business is to purchase NPA accounts from the banks & NBFC, providing a legal solution for managing the NPA ratios & better platform to recover the NPA loans.
Infusion of Private Debt: Replacing an NPA account with a private debt offers complete closure of NPA accounts. Private funds are available for closing the total outstanding or loans settled under the One-Time Settlement.
Conclusion
An NPA account is a threat to banks as well as borrowers. It has a negative impact on the bank balance sheet & reduces its profitability. On the other hand, it also affects the borrower company’s growth for many years.
But, through loan restructuring & the help of ARC companies, NPA can be managed.