Moreover, this article covers the commonly asked questions about NPA accounts, OTS (One-Time Settlement), and funding options for NPA.
What is the full form of NPA in banking?
The full form of NPA in banking is “Non-Performing Assets”.
What is the NPA meaning?
An NPA (Non-performing assets) means a loan account on which the borrower fails to pay the emi’s or interest for more than 90 days. Such accounts stop generating profits for the bank, so, without dragging it further, the bank classifies such loans as NPA and aims for full recovery of the loan.
What happens after NPA?
As a result, once a loan account is classified as NPA, it causes immense financial and mental pressure on borrowers. The bank will initiate the following issues:
- Debit freeze the current accounts
- Initiate recovery proceedings
- Enforce available security or collateral
- Take legal action for recovery
- Explore restructuring or other resolution mechanisms where permitted
- Assign or transfer the loan account to asset reconstruction companies
The exact course of action depends on the lender, the loan documents, security available, borrower profile and applicable laws.
Some of the strict actions of the bank:
Physical Possession of Collateral Properties
Once notice 13(4) is served, and upon expiry of its timeline, the bank tries to take physical possession of the properties. To do so, the banks take legal permission from the local authority and also seek police protection to avoid any nuisance while taking physical possession.
But, after taking possession, the borrower still claims the property within thirty days by submitting the total loan outstanding.
Auction of Properties
Once physical possession is taken, the bank lists the property for online auction.
DRT Court (Debt Recovery Tribunal)
The bank can also take the matter to the DRT courts, which are specially meant for legal & financial issues.
NCLT (National Company Law Tribunal)
If the borrower is running the business under a Pvt Ltd or Ltd company, then the bank can also drag the matter into the NCLT court to dissolve the company and recover its loan
Impact of NPA on Businesses and Individuals
What legal notice is served to the borrower after NPA?
The following is the Notice & actions by the Bank to the Borrower to recover NPA loans.
- Loan Recall Notice: This is a total loan recall notice issued by the bank after the declaration of the account as an NPA account. This notice says to deposit the entire amount of the loan within a particular time. This is the alarming stage for borrowers.
- Notice 13(2): This notice is issued by the bank after the above-said notice. This notice notifies the total outstanding amount in the account & gives a total of sixty days of time for repayment. This is the stage where the borrower needs to resolve this issue at his best.
- Notice 13(4): This notice is issued after the above 13(2) notice. This notice is also commonly known as a “Symbolic Possession Notice”. Through this notice, the bank notifies the borrower that the particular assets/properties will now legally belong to them & they can proceed with the further process of taking physical possession of the asset/property or other legal proceedings like auction of assets.
How to regularize the NPA account?
An NPA account can be regularized by clearing the outstanding interest, overdue amounts and other applicable dues on all loan accounts held by the borrower with the bank. Once all dues are paid and the account meets the bank’s conditions, the account can be eligible for a standard or regular.
Does NPA affect the CIBIL?
Yes, NPA-classified loans have a negative impact on the CIBIL report and lower the score. Currently, all banks & financial institutions consider a cleaner CIBIL report with a good credit score for sanctioning a new loan facility.
NPA-marked reports are not eligible for further funding, impacting the future growth of the businesses.
What is a One-Time Settlement (OTS)?
A One-Time Settlement, commonly called OTS, is a financial settlement of an NPA account outstanding at a lower value than actual, where borrowers promise to pay the settled amount in a lump sum within a pre-decided timeline.
The bank grants the OTS after evaluating the valuation of the underlying securities, the ageing of the NPA account, and the legal strength to recover the loan.
Can I get a loan for an NPA account?
Yes, some private companies offer loans for NPA accounts, which include NPA takeovers, fresh working capital loans, and companies with stressed accounts.
The new financier may evaluate factors such as:
- Value and quality of available collateral
- Outstanding loan amount
- Current status of the NPA
- Borrower’s repayment capacity
- Business viability
- Alternate repayment plan
Getting a loan from traditional banks & NBFC can be a tough task for NPA borrowers. Because, as per the policy, banks do not extend fresh loans to NPA borrowers or companies.
Is there any option of private finance or private LAP (loan against property) for NPA borrowers?
Yes, private finance (private LAP) is available for NPA accounts. They can avail of this against their collateral mortgage with the bank or free properties, aiming to close their stressed loans or to require funding for business expansion.
Generally, private finance is much costlier than traditional funding, but it bypasses the regulatory hurdles of obtaining a loan. It will be suitable for NPA borrowers or stressed companies having loans classified as SMA1 & 2, and also for paying OTS (One-Time Settlement)
Undoubtedly, private funders fill the gap in traditional financing, but borrowers may face high costs, trust issues, and tough documentation.
What is an NPA loan takeover?
An NPA loan takeover involves replacing the existing lender with a new financing arrangement, where the new financier provides funds to settle the existing lender’s dues, subject to the terms agreed between the parties.
The transaction may involve the transfer of the NPA account along with all underlying securities & collaterals. The new lender offers a fresh repayment plan in which the borrower can pay easily in monthly instalments.
An NPA loan takeover process may include:
- Assessment of the existing NPA account
- Evaluation of the collateral and its market value
- Review of the borrower’s financial
- Development of a repayment or exit strategy
- Approval of the proposed financing
- Settlement of the existing lender’s dues
- Completion of security and documentation formalities
Lenders can consider taking over an NPA loan if the borrower has adequate underlying assets or a viable resolution plan, provided a different financing structure is needed.
Which is better: Paying the complete NPA Account Liability or OTS (One-Time Settlement)
For most borrowers, an OTS (One-Time Settlement) is financially more beneficial if the bank agrees to it. However, the right choice depends on your objective, financial capacity, and long-term plans.
| Factor | Pay Complete NPA Liability | OTS (One-Time Settlement) |
| Amount Payable | 100% of outstanding dues (plus applicable charges) | Usually lower than the total outstanding amount, subject to OTS approval |
| Financial Burden | High | Lower |
| Bank Approval | Not required if you pay the full dues | Required; bank has complete discretion |
| Time to Close | Immediate once full payment is made | May take time for negotiation and approval |
| Interest Savings | No additional concession | Can result in significant savings if a settlement is approved |
| Credit Impact | Negative impact on the credit report & score | Highly impacted due to NPA & settlement done. It indicates that the borrower has taken a haircut to close the loan. |
Conclusion
- Pay the complete NPA liability if you can comfortably afford it and want to clear all dues in full. Paying the complete NPA liability could impact CIBIL, but it creates a good impression for future funding.
- Choose an OTS if the bank offers a reasonable settlement and it significantly reduces your repayment burden. This may discourage future lenders from sanctioning a new loan.
Will funding be available for closing the NPA Account as well as the OTS (One-Time Settlement)?
Yes, an NPA finance facility is available to close NPA accounts, and OTS funding is available to pay the borrower’s OTS on time.
The only difference, NPA finance will close the total loan outstanding, and OTS funding will be utilised to close the loans settled under an OTS scheme. Moreover, they share the following common features useful for the borrowers:
- Both can be directly disbursed to the previous bank to close NPA or OTS
- Can be raised against the same property/collateral lying in the previous bank or on an additional mortgage-free property
- In both cases, NPA loan accounts are closed permanently, including withdrawal of legal matters
- A new repayment tenor is offered with the option of a moratorium
- For approval, a strong repayment capacity with good valuation of collateral is required
What is OTS Funding?
In particular, OTS funding is a loan from a new lender to borrowers with NPA liability settled under OTS. Under this, the loan will be directly paid to the OTS loan account and all securities transferred to the new lender. It will take around 30 days for disbursal, so borrowers need to apply carefully within the
