A loan asset of a bank is considered as a Standard Asset as long as the borrower is paying the interest, instalments and other charges as and when debited to his account. A period of 30 days is generally allowed to the borrower to make such payments to the bank. In case the borrower fails to pay or service the account within 30 days from the data of charging, the borrowal account is termed as Irregular/Out of Order.
An account remaining irregular continuously for 90 days is classified as Sub-standard/Non-Performing Asset (NPA). Thus, in line with the international practices on prudential norms for banks, an asset is defined as non-performing when it ceases to generate income for the bank. Availability of security is never a criterion for deciding whether a loan asset is performing or non-performing.
Thus, Non-Performing Asset (NPA) is a loan or advance where:
(i) Interest and/or installment of principal remaining overdue for a period of more than 90 days in respect of a Term Loan;
(ii) The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted;
(iii) When an advance is disbursed in the form of overdraft/cash credit and the account remains out of order for more than 90 days. An overdraft/ cash credit account is considered to be out of order when the outstanding balance remains continuously in excess of the sanctioned limit/drawing power.
The account shall also be treated as out of order if there is no credit in the account continuously for a period of 90 days or more or the credits are not enough to cover the interest debited during the period of last 90 days. Non-submission of inventory and receivable statements for 90 days for computation of drawing power will also render the account out of order.
In terms of the prudential norms, an overdue amount means any amount due to the bank under any credit facility, which is not paid by the borrower on the due date fixed by the bank. Further, any amount to be received for use of credit cards, debits in suspense account, etc., from a customer and if it remains overdue for a period of more than 90 days, the same is also to be treated as NPA.
Ideally, a bank should have all its assets performing all the time and there should not be any non-performing asset. But it is extremely difficult to maintain a zero-NPA level. Like any other business activity, the banking business also witnesses a certain percentage of NPA in its asset (Credit) portfolio. However, the banks always endeavour to keep the NPA level to zero or the bare minimum. This is done by a structured NPA management in the bank.
RBI Guidelines on Prudential Norms:
Banks are required to classify the advance accounts in terms of the international practices and prudential norms.
The existing RBI guidelines regarding non-performing assets are given below:
Non-Performing Assets:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
A Non-Performing Asset (NPA) is a loan or an advance where:
(i) Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
(ii) The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC) for more than 90 days.
(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
(iv) For agricultural crop loans, the installment of principal or interest thereon remains overdue for two crop seasons for short-duration crops.
(v) The installment of principal or interest thereon remains overdue for one crop season for long duration crops under agricultural loan.
Banks should classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
‘Out of Order’ Status:
An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or the credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.
Overdue:
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
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