In the normal course, borrowers repay their dues to the bank by their respective due dates. Some debts, however, turn sticky. The borrower is unable or unwilling to pay. If such debt is shown as a regular debt, and interest is accrued on such debt as a regular income, then the financial statements would give an incorrect picture of the financial status of the bank. Therefore, RBI has laid down strict requirements regarding recognition of Non-Performing Assets (NPA).
An NPA is a loan or advance where:
• Term Loan – interest and / or instalment of principal remains overdue for
more than 90 days.
• Overdraft / Cash credit - account is out of order i.e.
o Outstanding balance remains continuously in excess of the sanctioned limit /
drawing power; or
o Outstanding balance is within the sanctioned limit / drawing power, but there are
no credits continuously for 90 days as on the date of balance sheet, or the credits are not enough to cover the interest debited during the same period.
• Bills purchased and discounted – bill remains overdue for more than 90 days.
• Short duration crops (crop season is upto a year) – instalment of principal or the interest thereon remains overdue for two crop seasons.
• Long duration crops - instalment of principal or the interest thereon remains overdue for one crop season.
A few more relevant points –
• Banks are supposed to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
• If an advance is covered by term deposits, National Savings Certificates eligible for
surrender, Indira Vikas Patras, Kisan Vikas Patras and Life policies, then it need not be treated as NPA. This exemption however does not extend to government securities and gold ornaments.
• Drawing power should be determined based on stocks statements that are not older than 3 months. Else, it would be treated as irregular.
• If irregular drawings are permitted in the working capital account for a continuous period of ninety days, it will become an NPA (even if the financial status of the borrower is stable).
• Regular and ad hoc credit limits are to be reviewed / regularized within 3 months from the due date / date of ad hoc sanction. If this is not done within 180 days of the due date / date of ad hoc sanction, the asset would be treated as NPA.
• Once arrears of interest and principal are paid by the borrower, the NPA becomes a
standard asset.
• If even one facility to a borrower or investment in securities issued by a borrower becomes NPA, all the facilities granted by the bank to the borrower and investment in all the securities issued by the borrower will have to be treated as NPA.
