Bank sells loans as different products to their borrower & bank consider these loans as their assets which earns interest income for them, which is collected as monthly emi or monthly interest. But when a borrower defaults on his monthly repayment & this stops generating income for the bank then the bank classifies this particular defaulted loan account as Non Performing Asset (NPA). Also as per RBI policy any account which defaulted on his repayment equivalent or more than 90 days, that account considered as non-performing asset.  Prior to NPA bank classifies borrower accounts on the month of first default ;

Click Here to get finance for your NPA Account

SMA 0Principal or interest overdue under 30 days
SMA 1Principal or interest overdue more than 30 days
SMA 2Principal or interest overdue more than 60 days
NPAPrincipal or interest overdue more than 90 days

So the main objective behind this classification is to take some appropriate steps to prevent the account from slipping in NPA classification.

But, once the account is classified as non performing asset. Bank start to recover the loan through some other ways of legal like issuing legal notices to borrowers, taking possession & auction the underlying securities/collateral under the sarfasi act 2002.

What is SARFASI Act 2002

The Sarfasi Act enables banks & financial institutions registered under RBI to sell or auction the borrower’s properties/assets in the event of default to recover their loan without any intervention from the courts.

The sarfasi act only applies to secured loans & agriculture properties/land does not falls under this act. An order from the court is not required for the selling or auction of collaterals so the bank can liquidate collateral via the auction process in a shorter period of time. Bank reduces their NPA ratio by enforcing sarfasi act.

Legal Notices issued by Bank to borrowers under Sarfasi Act

  1. Demand Notice 13(2):  Before taking any action under the SARFAESI Act, the bank must issue a demand notice to the borrower specifying the outstanding amount and calling upon the borrower to discharge the debt within 60 days from the date of the notice.
  2. Symbolic Possession Notice 13(4): If the borrower fails to comply with the demand notice, the bank can take possession of the secured assets. Before taking possession, a notice must be issued to the borrower stating the intention to take possession and giving them an opportunity to make their representation.
  3. Sale Notice: After taking symbolic possession of the secured assets, the bank can proceed with the sale. A notice of sale must be published in two newspapers (one in the vernacular language) and also displayed on the notice board of the concerned court or the office of the Collector or Magistrate. The notice must provide details of the sale, including the date, time, place, and reserve price of the assets.

Significance of Non-Performing Assets on Borrower

When a loan account is classified into non performing assets it creates lots of financial & legal issues to borrowers. In general, borrowers face the following multiple issues :

  1. Problem in maintaining accounts : A few years back, banks freeze the current accounts or cc/od facilities of borrowers, which creates problems in running the business as the payment collection method was blocked by the bank so the client was unable to receive the payments. But, recently Reserve Bank of India issued a notification that an NPA account borrower can run a current in any bank so this gives a big relief but still unavailability of cc & od facilities creates problems in day-to-day business operations.
  2. Legal Issues : Once an account slips into NPA, the bank starts sending legal notices & taking legal actions for recovery of the loan. Then borrower diverts his valuable time & money to confront those legal actions & notices, which indirectly affects the business.
  3. Possession of Collaterals: For recovery of the loan, the bank tries to take possession & auction of underlying securities & collaterals which will be a very difficult phase for the borrower. In some cases, residential property of personal use was mortgaged wherein in some cases bank takes the possession of factory or unit of the borrower after which the total business comes to a standstill and he is even more trapped financially.
  4. Drop Collateral Valuations: After bank possession, the property gains a very bad reputation in the market, even if the borrower wanted to dispose of the collateral & pay the bank that seems to be very difficult because nobody is willing to buy this property moreover local property broker tries to buy that property at a very cheaper rate as they know borrower is now trapped with the bank.

Significance of Non-Performing Assets on Banks

Non-performing assets (NPAs) have significant implications for banks, financial institutions, and the overall economy. Here are some of the key significance of non-performing assets:

  1. Financial Health of Banks: NPAs directly affect the financial health and stability of banks. When loans or assets become non-performing, it means that borrowers are not repaying their obligations as agreed. This, in turn, leads to a decline in the bank’s profitability, asset quality, and capital adequacy. High levels of NPAs can weaken a bank’s balance sheet and erode its ability to lend and support economic growth.
  2. Credit Risk Management: The presence of NPAs highlights weaknesses in credit risk management practices of financial institutions. It indicates that banks have either extended loans to borrowers with weak creditworthiness or have failed to effectively monitor and recover the loans. NPAs serve as a warning sign for banks to reassess their lending practices, improve credit evaluation procedures, and strengthen loan recovery mechanisms.
  3. Impact on Profitability: NPAs have a direct impact on the profitability of banks. When loans turn into non-performing assets, banks stop earning interest income on those loans. Moreover, banks may need to allocate additional provisions or reserves to cover potential losses arising from NPAs. These provisions reduce the bank’s profitability and can impact its ability to generate earnings and distribute dividends to shareholders.
  4. Economic Impact: High levels of NPAs in the banking system can have adverse effects on the overall economy. Banks with a large volume of NPAs may become reluctant to lend, particularly to sectors perceived as risky. This can constrain credit availability, leading to a slowdown in investment, business expansion, and economic growth. Additionally, NPAs can contribute to systemic risks and financial instability if left unaddressed.

What are the options for Borrowers?

  1. Re-structure of NPA Account : Borrower can apply for restructuring of his loan, restructuring allows some additional years for repayment while other facilities remain the same or are modified accordingly. This will be the best tool for handling the NPA situations as this prevents the borrower from paying the whole amount in a lump sum manner.
  2. Repay NPA account liability: Borrower can choose to pay the total outstanding in NPA account through some personal savings, sell other collateral or assets, and through personal borrowing from friends & relatives. This will end the npa account chapter permanently and he will be free from npa status & financial & legalities included with it.
  3. OTSOne Time Settlement : If paying complete npa liability is not possible then the borrower can also opt-out of one-time settlement with the bank. Through this, the bank can reduce the outstanding amount by wiping off undesirable interests & legal charges levied on the account. This enable borrower to settle down outstanding at a reduced price.
  4. Legal Help : Clients can seek legal help from their local DRT courts which especially addresses issues related to financial transactions. Through DRT court borrower can put his issues & problems in paying the loan on time and appeal for additional time for payment of the loan.
  5. Re-finance of NPA Account or NPA Loan: If a borrower does not have ample amount in hand to pay off his npa account liability then he can opt out for taking a new loan for clearing his npa liability. In this, another new lender comes in and pays the previous bank directly on behalf of the borrower to close NPA account completely and a new repayment plan is started with the new lender. This can be done in both ways through one-time settlement(OTS) at a reduced price or without taking an OTS & paying the complete npa account outstanding.

NPA Account Re-finance or NPA Loan

NPA Loan is a loan that is given by a RBI registered company to take over a borrower’s npa account liability by taking over his npa account from the previous bank and paying directly on behalf of the borrower to completely close the previous NPA account.

The Key benefits of NPA Loan

Click Here to get finance for your NPA Account

Leave a Reply

Your email address will not be published. Required fields are marked *