Non-Performing Assets (NPA) - Meaning, Types & Examples

The term Non-Performing Assets (NPA) might seem technical, but anyone involved in banking or finance must understand. Simply said, when a bank gives out a loan, it expects regular repayments in interest and the principal amount.

When the borrower fails to make these payments for more than 90 days, that loan becomes an NPA or non-performing asset. In this blog, we'll break down the non-performing assets meaning, explain how they work, and walk you through the types of NPAs with some examples of non-performing assets. Let's dive in!

What is NPA in Banking?

In banking terms, an asset is anything owned by a bank that generates income. This income typically comes from the interest and repayments made on loans. However, if a borrower stops making payments on a loan, the bank no longer earns from that asset. As a result, it becomes classified as a Non-Performing Asset (NPA).

According to the Reserve Bank of India (RBI), an NPA is defined as any loan or advance for which the payment of the principal or interest is overdue for more than 90 days. Simply put, when the money a bank lends out stops generating income due to missed payments, it's tagged as non-performing.

Also Read: How to Clear Overdue Payments with Personal Loans?

How Do Non-Performing Assets Work?

Think of a non-performing asset like a leaky faucet. When everything is working fine, the water flows smoothly, and you don't need to worry. But when the faucet breaks, water stops flowing, causing an issue. In banking, loans are like faucets that bring in money through interest. But when borrowers fail to repay their loans, the income flow stops.

Also Read: Understanding Your Loan Repayment Plan: A Breakdown

Here's a quick look at how an asset becomes "non-performing":

A bank gives out a loan to a borrower.

• The borrower stops making payments (on the principal or interest) for 90 days or more.
• After 90 days, the bank classifies the loan as a Non-Performing Asset (NPA).
• Depending on how long the loan has been unpaid, the NPA falls into different categories (more on this later).

When NPAs increase, banks struggle. They face reduced profits, limited funds to lend to others, and, ultimately, higher chances of loan defaults. That is why NPAs are a big concern for banks and why they need to be monitored closely.

Types of Non-Performing Assets (NPA)

Not all NPAs are the same. Depending on how long a loan has been overdue, the RBI classifies NPAs into three broad categories: Sub-Standard Assets, Doubtful Assets, and Loss Assets. Let's explore each in detail.

1. Sub-Standard Assets

When a loan has been overdue for less than or equal to 12 months, it is classified as a Sub-Standard Asset. In this stage, there is still some hope that the borrower may make payments or the bank may recover the loan with extra effort.

Suppose you took a personal loan from a bank and missed your EMIs for the last 6 months. The bank would classify your loan as a sub-standard asset since it hasn't been paid for less than 12 months.

2. Doubtful Assets

A loan becomes a doubtful asset if it remains unpaid for more than 12 months. In this stage, the likelihood of the loan being recovered is much lower, and the bank is uncertain whether it will get its money back.

Imagine you've taken a business loan and failed to make payments for 18 months. In this case, the bank would label the loan as a doubtful asset due to the extended overdue period.

3. Loss Assets

An asset is classified as a loss asset when the bank believes that it is almost impossible to recover the loan. That usually happens after a loan has remained unpaid for long and is considered "uncollectible." However, some residual value may still exist in the asset, which is why it hasn't been entirely written off.

A bank provides a loan to a company that later files for bankruptcy. After several years of unpaid dues, the loan may be classified as a loss asset since the chances of recovery are almost nil.

Non-Performing Asset Examples

To help you better understand what is NPA in banking, here are a few real-world non-performing assets examples:

• Housing Loans: If a homeowner stops paying their mortgage for 90 days, the loan becomes a non-performing asset. That might happen due to financial distress or loss of employment.
• Business Loans: A company that takes out a loan to expand its operations but fails to generate enough revenue to repay the loan on time becomes an NPA. That often happens during an economic downturn or poor business performance.
• Auto Loans: Suppose an individual buys a car on loan and fails to make repayments. After 90 days of missed EMIs, the car loan becomes a non-performing asset for the bank.

NPA Ratios: Understanding GNPA and NNPA

To assess the health of a bank's loan portfolio, the NPA figures are broken down into two important metrics: GNPA (Gross Non-Performing Assets) and NNPA (Net Non-Performing Assets).

• GNPA: These assets represent the total value of a bank's non-performing loans.
• NNPA: These assets are calculated by subtracting the provisions (money set aside for bad loans) from the gross NPAs.

For example, if a bank has ₹100 crore in loans classified as NPAs and it sets aside ₹40 crore as provisions, the NNPA would be ₹60 crore.

Conclusion

Understanding what NPA in banking is is essential for anyone involved in the financial sector, as NPAs can significantly impact a bank's health. Monitoring NPAs closely and implementing stringent recovery measures is crucial to ensuring a bank's long-term sustainability.

With policies in place to handle non-performing assets and the provision system helping banks prepare for potential losses, the banking industry continues to work towards minimising the impact of NPAs.