NPA Full Form

what is the full form of NPA?

The full form of NPA is Non Performing Assets. A non-performing asset (NPA) is a mortgage or advance for which the interest or principal payment is 90 days past due. This time frame of 90 days is considered to be standard. These NPAs are also known as bad loans. The term "non-performing asset" is typically used to describe a bank borrower's mortgage or credit for which one or more payments have been past due for a very long time. It is now regarded legally as a "non-performing asset" because the "asset" has made it impossible for the Bank to function or make any money.

This Story also Contains

1. what is the full form of NPA?
2. Types of NPA
3. Reasons for Using NPA?
4. How does NPA Work?
5. Example
6. Impact of NPA
7. Limitations of NPA
8. Conclusion

Types of NPA

NPA is divided into distinct groups. According to the state of the repayment, NPA is classified. We can categorise the NPAs as follows based on the history of an asset, a default time frame, or a risk factor.

• Standard Assets

Standard assets are the ones with the lowest risk. They pose a low risk, following bank regulations. Additionally, the Bank is in a position to make money off of these assets. These are the different asset classes where the borrower seeks to make erratic and infrequent payments.

• Substandard Assets

Assets that have been in the NPA group for 365 days or more are considered sub-standard assets.

• Doubtful Assets

Assets with doubtful performance that have been inactive for more than 365 days are considered doubtful assets.

As a result, it can be said that they pose a "higher than usual risk," and the lender must take extra care.

• Loss Assets

The RBI considers loss assets to be uncollectible and of such low value that their continued existence as bankable assets is not warranted, even though there may be some salvage or recovery value.

Reasons for Using NPA?

• Used by borrowers who are in default or non-payment.

• The unfavourable business environment is caused by natural disasters, political justifications, or other elements.

• Lenders with bad credit histories are eligible for the loan.

How does NPA Work?

Normal loans and advances fall under the category of NPA after an extended period of non-recovery, which is typically 90 days. The lender has the right to require the borrower to sell the asset pledged as security for the loan after the allotted time and to do so after giving the borrower advance notice of the intention to do so.

However, if no asset is pledged, the lender must write off the advance as a bad debt and will work at a reduced rate with the collection agency. Any time during the loan's term, a loan can be labelled as NPA. As a result, it is added to the balance sheet of financial institutions, harming their reputation.

Example

Justin Inc. borrowed $100 million from a loan provider and made monthly payments of $200,000. However, for three consecutive months, the company was unable to pay the instalments due to several factors. To comply with legal requirements, the lending company will be compelled to categorise this loan as a non-performing asset.

Impact of NPA

The NPA issue in our banking system is alarming right now. The NPA is the most crucial. The confidence of depositors, lenders, or investors is the lowest. It restricts credit availability and harms the institution's reputation. The following are a few significant effects:

• Profitability – It has a direct impact on the institution's profit. The institution must make provisions for NPA, which results in 25% to 30% more provisions and lower profits the higher the NPA.

• Liability Management - To manage NPA, banks must reduce deposit interest rates while raising lending rates, which has an impact on a bank's operations and the expansion of the economy.

• Asset Contraction- As NPAs rise, the flow of money is slowed down, which reduces interest income for the bank.

• Capital Adequacy- Banks are required by regulations to maintain the necessary capital on risk-weighted assets. More capital induction is needed as NPA increases, which raises capital costs.

• Public Confidence- NPA undermines banks' creditworthiness. Because the bank's liquidity is in danger, the public is afraid to deposit money with the bank because it has more NPA.

Limitations of NPA

The most crucial indicator of a bank's or financial institution's soundness, performance, and health is NPA. The performance of other banks or institutions suffers, and the bank's creditworthiness declines, as NPA increases. It has a detrimental impact on a bank's reputation, which can only be measured by total NPA. So, carrying it out is a very crucial step.

Several drawbacks are listed below:

• Reduced Income: As NPA assets rise, the profitability of financial institutions falls because fewer assets are realised.

• Falling Financial Strength: Since NPA is nothing more than assets with a lower chance of realisation, these have a direct impact on a company's financial stability.

• Discredit to Business Image: It has a significant impact on the organization's financial image.

• Falling Credibility: This has a negative impact on the reputation of lending institutions. Due to the increased risk of non-repayment, lenders also show little interest in making loans.

• Loss of Capital/Reserves: As a result of higher probabilities of non-recovery, a company not only loses future profitability but also suffers a loss of the principal amount granted.

Conclusion

Assets that have been designated as non-performing (NPA) are those that have not been recovered after a predetermined period of time—typically 90 days—of non-recovery of instalment payments. They can also be categorised as standard, inferior, dubious, and lost assets. It compromises the company's profitability, financial stability, capital sufficiency, and reputation. In order to monitor the NPA of financial institutions, various government organisations are set up under the Parliament Act or other statutes, which helps to lower NPA and boost profitability across the board for the organisation and the economy.