As per RBI’s Financial Stability Report December 2024, Gross NPA ratio of India’s banks falls to a 12-year low of 2.6%.
NPA expands to non-performing assets (NPA). Reserve Bank of India defines Non Performing Assets in India as any advance or loan that is overdue for more than 90 days.
“An asset becomes non-performing when it ceases to generate income for the bank,” said RBI in a circular form 2007.
To be more attuned to international practises, RBI implemented the 90 days overdue norm for identifying NPAs has been made applicable from the year ended March 31, 2004. Depending on how long the assets have been an NPA, there are different types of non-performing assets as well.
NPA Meaning & its Full Form
NPA stands for Non-Performing Asset. According to the Reserve Bank of India (RBI), an NPA is any loan or advance that has been overdue for more than 90 days. In simpler terms, an asset is considered “non-performing” when it stops generating income for the bank, typically because the borrower—whether an individual or business—has failed to pay the interest or principal. The RBI introduced the 90-day overdue standard for identifying NPAs from March 31, 2004, to align with global practices.
What is an Asset and Nonperforming Assets for a Bank?
Asset means anything that is owned. For banks, a loan is an asset because the interest we pay on these loans is one of the most significant sources of income for the bank.
When customers, retail or corporates, are not able to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not earning anything for the bank. Therefore, RBI has defined NPAs as assets that stop generating income for them.
How Nonperforming Assets (NPA) Work?
Non-Performing Assets (NPAs) are loans or advances issued by banks or financial institutions that no longer bring in money for the lender since the borrower has failed to make payments on the principal and interest of the loan for at least 90 days.
A debt that has been past due and unpaid for a predetermined period is known as a non-performing asset (NPA).
When the ratio of NPAs in a bank’s loan portfolio rises, its income and profitability fall, its capacity to lend falls, and the possibility of loan defaults and write-offs rise.
To address this issue, the government and the Reserve Bank of India have introduced various policies and methods to manage and reduce the amount of non-performing assets (NPAs) in the banking sector.
Types of NPA
- Sub-Standard Assets: Loans are considered sub-standard if they remain unpaid (NPA) for up to 12 months.
- Doubtful Assets: Loans become doubtful if they are unpaid (NPA) for over 12 months.
- Loss Assets: These are loans that are considered uncollectible or of such low value that they are unlikely to be recovered. Some residual value might still exist, but they are generally not treated as recoverable assets, even if not fully written off yet.
GNPA and NNPA
– GNPA: GNPA stands for gross non-performing assets. GNPA is an absolute amount. It tells you the total value of gross non-performing assets for the bank in a particular quarter or financial year, as the case may be.
– NNPA: NNPA stands for net non-performing assets. NNPA subtracts the provisions made by the bank from the gross NPA. Therefore net NPA gives you the exact value of non-performing assets after the bank has made specific provisions.
FAQs
What is the significance of NPAs for banks?
NPAs are a significant concern for banks as they indicate that a portion of the bank’s lending is not being repaid. This affects the bank’s profitability, liquidity, and overall financial health. High NPAs can lead to higher provisioning requirements, reduced lending capacity, and can impact a bank’s credit rating.
How do NPAs affect the economy?
When banks have high NPAs, they may become cautious in lending, leading to reduced credit flow in the economy. This can affect businesses, especially small and medium enterprises (SMEs), by limiting access to loans, potentially stalling economic growth.