A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. Loans that are being given by the Indian banks and other operating financial institutions whose interests as well as the principal amounts have been in a state of overdue status for a fairly long time. The businesses sometimes default on the loan repayments and this causes banking NPA (non-performing assets).
What are the Causes of Non-Performing Assets?
- The major causes for NPAs are willful default, miss. Utilization of borrowed funds, lack of proper pre enquiry before issuing loan.
- The businesses of most of the corporates were adversely affected due to slowdown in the global Spread of COVID 19. This is the one of the most important reason behind increase in NPA of public sector banks.
- The priority sector lending (PSL) sector has contributed substantially to the NPAs. Priority sector includes agriculture, education, housing, MSMEs.
How to avoid or reduce Non-Performing Assets?
- To release a notice to borrower asking them to release the payment within 60 days from the receipt of notice.
- Compromise or use various settlement schemes. Use alternative dispute resolution mechanisms for faster settlement of dues such as use Lok Adalats and Debt Recovery.
- A ‘4R’ strategy of Recognition, Resolution, Recapitalization and Reforms. “After recognition, quantification of NPAs started in a planned manner, recovery also started.
- Banks write off an NPA when all recovery measures are exhausted and chances of recovery of loan are remote.
- Lenders have options to recover their losses, including taking possession of any collateral or selling off the loan at a significant discount to a collection agency.