Learn Everything About Non Performing Assets

Every business requires capital at various stages for running & growing the business. So besides promoter capital businesses raise capital in the form of loans from the banks & NBFC. Businesses make a profit by infusing these loans in their business model in the shape of working capital limits or term loans for developing infrastructure or purchasing machinery. Banks also make a profit by selling loans to these businesses, so loans also called assets for the banks earn interest/profit for the bank. 

But what if these loans will not be repaid by borrowers/businesses? Banks categorized this irregularity in repayment in the following and also define these loans as Special Mention Accounts.

Special Mention Account (SMA) refers to an account that exhibits signs of potential credit weakness or is at risk of becoming a non-performing asset (NPA). Special Mention Accounts are typically classified into three categories: SMA-0, SMA-1, and SMA-2. 

SMA-0 represents the lowest level of risk in which payment is overdue under 30 days

SMA-1 indicates a moderate level of risk in which payment is overdue more than 30 days

SMA-2 represents the highest level of risk in which payment is overdue more than 60 days

But if a loan account goes beyond the capacity of Special Mention Accounts, that particular loan account is declared as Non Performing Asset(NPA). In such conditions, you can avail NPA Finance from Fund Source India to close your NPA Account and all legal litigations associated with it.

NPA Full Form in Banking – The full form of NPA is Non Performing Assets

What is Non Performing Assets?

When a borrower defaults on his monthly repayments for more than three months or 90 days, then this stops generating income for the bank then the bank classifies this particular defaulted loan account as Non Performing Asset (NPA)

NPA Meaning: More precisely, as per RBI(Reserve Bank of India) policy any account which defaulted on its repayment equivalent or more than 90 days, that account is considered a non performing asset. NPAs directly affect the financial health and stability of banks. When a loan’s assets become non performing(NPA), which leads to a decline in the bank’s profitability, asset quality, and capital adequacy. Higher levels of NPAs can weaken a bank’s balance sheet and effects its ability to lend and its ability to support economic growth. 

There are different types of NPA as per banking policies: 

Types of NPA: NPA accounts are categorized on the basis of their existence as NPA accounts or the duration for which they remain as NPA accounts. NPA accounts are categorized in the following terms/ways: 

  1. Sub-Standard Asset: These are the NPA accounts that remain less than or equal to 12 months. Generally, these are the most standard types of accounts any bank can hold as NPA accounts holders requires some time to recover from business issues and to close their account with banks, usually borrowers take at least 12 months for such recovery.
  2. Doubtful Assets: Any NPA accounts that remain with a bank in the same status for more than 12 months are called Doubtful assets.
  3. Loss Assets: When a bank fails to recover the amount from an NPA account, then this NPA account is called a loss account. There is a great scope of settlement with the bank if borrowers wish to pay in this category.

What are the reasons for NPA : 

  1. Loss in Borrower business: This is the most common factor which contributes the most towards the rise in NPA.
  2.  Delays in project launching: If there is a delay in a project launching for which a loan has been taken that means repayment has been stopped due to unavailability of business income, hence account slips into NPA.
  3. Delays in Payments: Any delays in debtors’ payments, disturb the loan repayment cycle & on large scale delays lead to slipping into the NPA account.
  4. Natural Calamity or disasters: The corona Pandemic was the latest example of a natural calamity that affected businesses around the world on a very large scale or some other kinds of natural disasters affects businesses on a large scale.
  5. Man-made errors: Like fire in a factory or godowns of borrowers give a huge loss which not only stops bank repayment but also takes many years to recover.