Non Performing Assets or NPA are the bad debts of financial institutions or banks.
Non Performing Assets can be defined as:
“Interest or installments or principal that remains outstanding or overdue for a period more than 180 days with respect to loan terms”
“Interest or installment or principal outstanding or overdue for a period of two harvest seasons or 2 ½ years in case of agricultural loans”.
Identification of Non Performing Assets
Non Performing Assests are the loans that are in jeopardy of default. If the borrower fails to make interest or principle payments for 90 days the loan is considered to be a non performing asset.
It can be identified when
- Interest and/or installment of principal remain overdue for a period of more than 90 days.
- The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),
- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
- No active transactions in the account for more than 90 days.
These are few of the criteria to identify a non performing asset.
Classification of Non Performing Assets
NPAs are classified under 3 categories;
- Sub-standard:- the loans that remain as NPA for a period equal to 18 months.
- Doubtful:- the NPAs that remain over due for a period more than 18 months.
- Lost Asset : Identified as lost cause by banks internal audit but not yet written off.
SARFAESI Act, 2002
SARFAESI Act or Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is a measure by the Govt of India to crack down willful defaulters.
The act gives the banking and financial institutions regarding NPAs.
The provisions of this Act are:
- When Banks/Financial Institutions have 75% share in the dues owed by the borrower, they can collectively proceed to the following, in the event of the account becoming NPA.
- Issue notice of default to borrowers asking them to clear the dues within 60days.
- On the failure of the borrowers to repay:
- Take possession of security
- Take over the management of the borrowing firm
- Appoint a person to manage the firm
- If the case is before the BIFR, the proceedings can be stalled if the banks or Financial Institutions having 75% share in dues, have already taken step.
- The banks / Financial Institutions can also sell security to Asset Reconstruction Company.
Asset Reconstruction Company
ARC helps in resolution of Non Performing Loans (NPL). It enforces the resolution of NPL through SARFAESI Act 2002. One of the methods of resolution of loan is through the sale of secured asset through auction. It came into effect after the Narshimham Committee II report.
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