NON-PERFORMING ASSETS (NPAS)
Loans and advances of banks appear on the asset side of the balance sheet and are classified as assets. It is expected that the banks recover interest on their loans and advances and that the principal amount comes back as stipulated at the time of sanctioning loans. If the payment of interest is delayed or defaulted and the principal amount or the installments are delayed or defaulted an account is said to be over due. If the accounts remain overdue or past due beyond the stipulated time the accounts are classified as Non-Performing Asset/ NPA.
A loan account or advance becomes a non-performing asset (NPA) when:
- interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan;
- the account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC) (an account should be treated as “out of order” if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power);
- the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted;
- interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
- any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
Effect on Borrower when an account becomes NPA:
- The CIBIL score is directly related with the credit worthiness and defaults made by the borrower. It will directly impact the CIBIL score of the customer.
- For a borrower, day to day operation of the bank account becomes difficult as the Bank starts adjusting money deposited against their dues.
- Bankers start giving rough treatment to the borrower which lead to demoralization of the borrower.
- No other banks would sanction a loan to a Company/borrower whose account has turned NPA.
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