NPA Flashcards
NPA
Those account of borrowers who have defaulted in payment of interest or installment of principal or both for 90 days min.
Pvt Sector is managing their NPA’s better through improvements in asset quality.
There is a difference between Net NPA and Gross NPA.
a. Gross NPA = Net NPA + Provisioning
b. Provisioning is the amount of money that a bank keeps (on the advice of RBI) especially for this purpose.
Stressed Assets
It is a broader term and comprises of NPAs, restructured loans and written off assets.
Restructured Loans
Assets/loans which have been restructured by giving a longer duration for repayment, lowering interest or by converting them to equity.
Written-off assets
Assets/loans which aren’t counted as dues, but recovery efforts are continued at branch level - Done by banks to cleanup their balancebooks
NPA
It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more.
In case of Agriculture/Farm Loans, the NPA varies for short duration crop (interest not paid for 2 crop seasons) and long duration crops (interest note paid for 1 Crop season).
Substandard Assets
Assets which have remained NPA for a period less than or equal to 12 months
Doubtful Assets
Assets which have remained in the substandard category for a period of 12 months
Loss Assets
Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value
Sub Primer Borrowers
Borrowers who have a high chances of defaulting on their loans.
Lending to subprime borrower is risk or for banks.
Such lending was the major reason for great Financial crisis of 2008
Over Leveraged Company
Company which has high debt to equity ratio.
Faces problem in paying the interest and principal for the amount borrowed
Zombie Lending
When weak bank continues giving loan to a risk of borrower (Sub- prime/Over leveraged)
Reasons for NPA
Bank side problems
a. Low asset quality
b. Failure of bank credit appraisal system
c. Failure of recovery system
Economic Environment
Work Legal framework for asset recovery
Inadequate infrastructure for securitization and asset creation
Priority sector lending
Problems with high NPAs
Stock prices of banks went down
Profitability diminishes.
Precious capital is locked up.
Cost of lending increases due to capital crunch
Investment suffers
What is being done to deal with problem of NPA
Provisioning
CAR Norms
Securitization laws
Foreclosure norms
Debt recovery Tribunals
Asset reconstruction companies
SARFAESI Act 2002
Securitization and reconstruction of financial Assets and enforcement of security interest law, 2002
In short, we can say that it’s a law to make recovery of bad loans much easier from wilful defaulters.
This law has given power to financial institutions to take over management control and to capture property of loan defaulter.
Broadly 3 mechanisms
a. Securitization is the process of pooling and repackaging of financial assets (like loans given) into marketable securities that can be sold to investors
b. Asset reconstruction is the activity of converting a bad or non-performing asset into performing asset.
c. Enforcement of Security Interests
