What Happens After NPA?

What is NPA?

NPA refers to Non-Performing Asset. When a borrower stops paying the EMIs or interest in a particular loan account equivalent to or more than ninety days, then the bank declares that account as a non-performing asset (NPA). It also means that the loan account that stops generating profits to the bank is considered an NPA Account.

What happens after NPA?

When a loan account or borrower slips into the NPA, he faces multiple issues from the banks, like financial restrictions, immediate demand for the total loan outstanding, and a legal process to recover the loan from the borrower. All this makes the borrower unable to run the business properly and puts pressure on him to confront the bank financially and legally. 

A bank is a legal body with extensive legal support from the government to ease loan recovery. Banks are equipped with the SARFAESI Act, which enables them 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 following are the consequences that can be faced after the NPA.

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Financial Restrictions

• Difficulty in the day-to-day operations of accounts as the bank starts adjusting the money deposited in accounts towards its charges and interest. And above that limit, & other facilities will be suspended.
• Problems in maintaining accounts with other banks. As the bank starts to interfere with your other bank operations.
• The borrower will face problems getting loans from other banks & NBFCs as per policy restrictions. NPA clients are not eligible for loans & other such facilities
• The bank starts legal procedures for the recovery of its loan. So the attitude toward clients becomes arrogant & authoritative, and legal procedure distracts focus from business to fighting legal situations.
• At some later stage, the bank tries to take possession of the collateral and properties. If your business properties are involved, then the client’s business and unit are completely at risk of shutting down.
• Properties engaged in the loan will lose their market reputation as bank proceedings put up a notice on the property, and the auction process greatly affects this. This results in a lower market value of properties.
• Lastly, as no other bank or NBFC is willing to give finance to an NPA loan borrower, it is now difficult to take a loan for NPA accounts from the market and repay the NPA account for the borrower.

Legal Actions on the Borrower

The following is the Notice issued 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 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 for the further process of taking physical possession of the asset/property or other legal proceedings like auction of assets.

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. For doing 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 the 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 the 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

Impact on Businesses

1. Financial burden: When a business’s loans become NPAs, it indicates that the business is unable to meet its debt obligations. This can lead to a financial burden and affect the company’s overall liquidity.
2. Operational Disruptions: The lack of available funds due to NPAs can disrupt day-to-day operations, leading to delays in projects, layoffs, or even closure in severe cases.
3. Investor Confidence: High levels of NPAs can impact investor confidence, resulting in a decline in stock prices or reluctance from potential investors to invest in the company.
4. Legal Challenges: Businesses may face legal actions from creditors seeking to recover their dues. This can lead to additional costs and redirect management’s focus from core business activities.

Impact on Individuals

1. Credit Score: For individuals, having an NPA can severely impact their credit score, making it difficult to obtain loans, credit cards, or even favourable terms on future financial products.
2. Stress and Anxiety: The financial burden of dealing with an NPA can lead to increased stress and anxiety, affecting an individual’s mental health and overall well-being.
3. Asset Loss: In cases where loans are secured by assets (such as property or vehicles), individuals may face the risk of losing these assets if they are unable to repay the loan.
4. Limited Financial Opportunities: With a poor credit history, individuals may find it challenging to access financial opportunities, such as home loans or educational loans, which can impact their personal and professional growth.

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