All about Non Performing Accounts (NPA)

Banks provide loans to borrowers as various financial products, considering these loans as assets. These assets generate interest income for the bank, typically collected as monthly EMIs or interest payments. However, when a borrower defaults on their monthly repayments, the loan stops generating income. In such cases, the bank classifies the defaulted loan account as a Non-Performing Asset (NPA).

As per the Reserve Bank of India (RBI) guidelines, any loan account that remains overdue for 90 days or more is categorized as an NPA. Additionally, before classifying an account as an NPA, the bank identifies and monitors the borrower’s account from the first instance of default.

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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 a non-performing asset. Banks start to recover the loan through other legal ways like issuing legal notices to borrowers, taking possession & auctioning the underlying securities/collateral under the Sarfasi Act 2002.

What is the 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 court intervention.

The Sarfasi Act only applies to secured loans & agriculture properties/land does not fall 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 time. Bank reduces their NPA ratio by enforcing Sarbani Act.

Legal Notices issued by the Bank to borrowers under the 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 allowing them 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. The problem in maintaining accounts: A few years back, banks froze the current accounts or cc/od facilities of borrowers, which created 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 is mortgaged whereas 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 the 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?

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

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