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Unit 15: Management of NPAs by Banks

15.1 Meaning of NPA Notes

As per Reserve Bank of India’s guidelines, income on loans is to be recognised on receipt basis
(as against accrual basis) and if it has not been received for a specified period, the same asset is
to be treated as non-performing. The basis for doing so is given below:
1. Term Loan: Term Loan account will be treated as NPA if interest or installment of principal
is in arrears for any two quarters out of four quarters, though the default may not be
continuously for two quarters during the year. The default may be considered by applying
the concept of past due i.e. if not paid within 30 days from the due date.
2. Cash Credit and Overdrafts: A cash credit or overdraft account will be treated as NPA if
the account remains out of order for a period of two quarters. An account should be treated
as “out of order” if the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power.

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Caution In case where the principal operating account is less than the sanctioned limit/
drawing power but there are no credits continuously for six months as on the date of
balance sheet or credit are not enough to cover the interest debited during the same
period, these accounts should also be treated as “out of order”.
3. Bills Purchased and Discounted: The bills purchased/discounted account should be treated
as NPA if the bill remains overdue and unpaid for a period of two quarters.

4. Other Accounts: Any other credit facility should be treated as NPA if any amount to be
received in respect of that facility remains past due for a period of two quarters. An
amount should be considered past due, when it remains outstanding for 30 days beyond
the due date.

Notes Classification of NPA
The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard Assets: These are loans which do not have any problem are less risk.
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2. Sub-standard Assets: With effect from 31 March 2005, a sub standard asset would
be one, which has remained NPA for a period less than or equal to 12 months. In
such cases, the current net worth of the borrower/ guarantor or the current market
value of the security charged is not enough to ensure recovery of the dues to the
banks in full. In other words, such an asset will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterised by the
distinct possibility that the banks will sustain some loss, if deficiencies are not
corrected.

3. Doubtful Assets: With effect from March 31, 2005, an asset would be classified as
doubtful if it has remained in the sub standard category for a period of 12 months. A
loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub standard, with the added characteristic that the weaknesses make
collection or liquidation in full, – on the basis of currently known facts, conditions and
values – highly questionable and improbable.

Contd...

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