- Non-Performing assets are the loans or advances given by the bank to its client
- A loan will be treated as Non-Performing when the client failed to pay installment for a period at least 90 days or more
- When a loan is not produced income, it is treated as Non-Performing assets
- This loan is classified as – Standard, Sub-standard, Doubtful and Bad.
Non-Performing Assets (NPA)
Loan sanctioned in favor of client is the assets of the Bank. Loans given to client are the most important assets for the bank. Similarly, Bank may also purchase Government and other securities which are considered an investment also the assets of the bank.
Non-performing assets refer to the loan or advances that are not performed for a particular time and didn’t generate revenue to the bank. Usually, debt is classified as non-performing when loan installment is not paid for a period of 90 days. This duration may be longer than this. An asset becomes non-performing when it is not produced income for the bank.
How Loans (Assets) are classified?
Loans are classified in terms of its repayment status. This classification is – Standard, Sub-standard, Doubtful and Bad. Clarification of these assets (loans) are as follows:
Standard Assets (Loans):
Standard Assets (Loans) does not disclose any problem and it does not carry more than normal risk attached to the business. These assets are not considered as Non-performing assets.
Sub-standard Assets (Loans):
This is considered as Non-Performing assets. Income doesn’t generate for a period less than or equal to 12 months.
Doubtful Assets (Loans):
Another non-performing asset which is remained in the sub-standard category for a period of more than 12 months.
Bad Assets (Loans):
An asset is considered as a Non-performing asset if the asset doesn’t produce revenue for more than 36 months.
Types of Non-performing Assets
Term Loan is the most common non-performing assets. But there are other ways loans and advances may become non-performing, which are listed below:
- Overdraft and Cash Credit (OD/CC)
- Bill overdue for more than 90 days for bills purchased and discounted.
- Expected payment is overdue for more than 90 days in respect of other accounts
- No activity in the Cash Credit (CC), Overdraft (OD) etc. for more than 90 days.
Example of Non-Performing Assets (Loan)
Suppose, United Commercial Bank provided the loan to its client IHL Ltd. The loan amount is $10 million @ 5%. In this respect, the bank will earn till the tenure of the loan in form of “Interest Income.” This loan amount is the assets of the bank that is shown in the asset side on the “Balance Sheet” and interest is the income of the bank shown in the “Income Statement.”
If this asset becomes overdue for a minimum of 90 days, it will be considered as non-performing assets.
Main Causes of Non Performing Assets
There are several causes for assets turned into bad, few of them are:
- Country’s economic instability like inflation and other policy of government may seriously affect the loan taker. Consequently, he may fail to pay an installment timely.
- Loans and advances department may not verify clients financial health
- The client may transfer fund to other concern or any unauthorized concern intentionally