Context:

  • As per the information shared by the Reserve Bank of India (RBI) in reply to the RTI question, scheduled commercial banks (SCBs) had written off non-performing assets (NPAs) - an acronym for loans that have gone bad worth over Rs 10,57,000 crore in the last five years.

What is NPA?

  • A non-performing asset (NPA) is a classification used by financial institutions for loans and advances on which the principal is past due and on which no interest payments have been made for a period of time.
  • In general, loans become NPAs when they are outstanding for 90 days or more, though some lenders use a shorter window in considering a loan or advance past due.
  • A loan is classified as a non-performing asset when it is not being repaid by the borrower.
  • It results in the asset no longer generating income for the lender or bank because the interest is not being paid by the borrower.
  • In such a case, the loan is considered “in arrears.”

Sub-Classifications for Non-Performing Assets (NPAs):

  • Lenders usually provide a grace period before classifying an asset as non-performing. Afterward, the lender or bank will categorize the NPA into one of the following sub-categories:

1. Standard Assets:

  • They are NPAs that have been past due for anywhere from 90 days to 12 months, with a normal risk level.

2. Sub-Standard Assets:

  • They are NPAs that have been past due for more than 12 months.
  • They have a significantly higher risk level, combined with a borrower that has less than ideal credit.
  • Banks usually assign a haircut (reduction in market value) to such NPAs because they are less certain that the borrower will eventually repay the full amount.

3. Doubtful Debts:

  • Non-performing assets in the doubtful debts category have been past due for at least 18 months.
  • Banks generally have serious doubts that the borrower will ever repay the full loan.
  • This class of NPA seriously affects the bank’s own risk profile.

4. Loss Assets:

  • These are non-performing assets with an extended period of non-payment.
  • With this class, banks are forced to accept that the loan will never be repaid, and must record a loss on their balance sheet.
  • The entire amount of the loan must be written off completely.
Syllabus: Prelims; Economy SOURCE: BUSINESS LINE