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Introduction to Non-performing Assets
NPA Full Form in a bank means non-performing assets (NPA). In India, according to the Reserve Bank of India, NPAs are defined as advances or loans that are overdue for more than 90 days. RBI stated in a circular from 2007 that “an asset becomes non-performing when it ceases to generate income for the bank.” Different types of non-performing assets exist based on the duration of being an NPA. Loans given by banks are considered their assets. If a loan’s principal or interest is not paid to the bank, it becomes a Non-Performing Asset, NPA Full Form.
An asset that stops giving returns to investors for a specific period, usually 90 days, is called an NPA. The timeframe can vary based on agreements between the financial institution and the borrower.
These non-performing assets harm banks’ profits, and their reputation suffers. Globally, India ranks 5th in handling NPAs.
Classification of NPA
Understanding these full forms of NPA in bank classifications helps banks assess the risk associated with each asset and make informed decisions about managing them.
An asset not performing for less than 12 months is a substandard asset. If an asset has been non-performing for over 12 months, it is a doubtful asset. Loss assets require full write-off due to identified losses. These assets have a long period of non-payment, so they will not be repaid.
Types of NPA
Standard Assets
NPAs are overdue for 90 days to 12 months, with normal risk.
Sub-Standard Assets
NPAs were overdue for over 12 months, higher risk, and the borrower has less ideal credit.
Doubtful Debts
NPAs are overdue for at least 18 months, and serious doubts about full repayment impacts the bank’s risk profile.
Loss Assets
An extended period of non-payment, loan considered irrecoverable, loss recorded on the balance sheet.
Causes and Consequences of NPAs
The Indian economy boomed in the 2000s. Businesses borrowed heavily from Indian banks for their projects, especially in the infrastructure and power sectors. Unfortunately, many of these projects turned unviable and the aftermath of the 2008 recession. Consequently, banks’ balance sheets suffered, with NPAs skyrocketing by 2013. Industrial credit grew rapidly from 2006 to 2011 when the GDP growth rate peaked. However, after 2011, as GDP growth slowed, industrial sector profit margins declined, leading to loan defaults and a surge in NPAs.
Surveys show that as of June 30, 2018, the banking sector’s gross NPAs were 11.52%, slightly lower than the 11.68% recorded on March 31, 2018. In 2019, public sector banks had around 7.3 trillion INR in NPAs, which decreased to approximately 6 trillion INR in 2021. The rising NPAs erode banks’ profitability and weaken their capital base. Persistent NPA growth leads to a chronic situation, causing severe crises for banks trying to stabilize. Account holders lose trust and demand to withdraw money, jeopardizing the banking system. Banks must lower interest rates on savings deposits to offset the impact of high NPAs.
By 2021, NPAs in Indian banks had nearly doubled, with Yes Bank facing a different scenario. The bank’s stock price plummeted when NPA issues emerged in mid-2018. The crisis reflected the bank’s inability to raise independent capital to address potential losses, resulting in downgrades, withdrawal of deposits, and intervention by the RBI.
Mounting NPAs not only reduce banks’ profitability but also undermine their credibility. Public sector banks are particularly at risk, with NPAs threatening to erode half of their capital base. Persistent losses and uncorrected fundamentals can destabilize depositors’ confidence, leading to a collapse of the banking system. Therefore, NPAs must remain within sustainable limits to ensure stability.
High NPAs also force banks to lower interest rates on savings deposits to increase margins. There is a gap between interest rates offered by banks and other non-banking accounts like PPF and post office saving schemes. Further disparity may divert funds from banks to non-banking sectors, further eroding banks’ capital.
NPA Resolution Mechanisms
To address the issue of NPA in banks and enhance their profitability, several measures can be implemented:
- Hold senior executives accountable for lapses rather than blaming junior staff.
- Improve corporate governance within banks
- Grant banks greater authority to tackle high NPAs.
- Implement an Effective Management Information System (MIS) to ensure effective credit risk management.
- Establish reconstruction companies to handle stressed assets.
- By taking these steps, banks can work towards resolving the NPA problem and improving their overall financial health.
Regulatory Framework and Policies
NPA is rising due to the Twin Balance Sheet (TBS) syndrome, affecting banks and big companies. To tackle this challenge, the Government has introduced a 4-R Strategy:
- Recognize: Assess assets at their true value.
- Recapitalize: Invest in struggling banks to protect their capital.
- Resolve: Sell off stressed assets.
- Reform: Prevent similar issues from arising in the future.
RBI has launched an Asset Quality Review (AQR) to aid recognition, making it mandatory for banks to disclose actual NPAs. However, progress in resolving NPAs remains slow.
RBI has implemented schemes like S4A, CDR, SDR, and JLF to address NPAs. The Government has introduced the Insolvency and Bankruptcy Code (IBC), allocated funds for recapitalization, and established ARCs. Yet, these initiatives have not yielded the desired results.
NPA Prevention and Management
The Government has proposed a new NPA resolution policy, amending the Banking Regulation Act to empower RBI in directing banks to recover NPAs. RBI can form oversight panels to protect bankers, and sector-specific strategies can be adopted. Banks can also settle loans under RBI guidance. JLF decisions now require agreement from 50% of lenders by number and 60% by value. Though NPAs involve significant amounts, the problem is primarily concentrated in 40-50 companies, mainly in the power, steel, heavy metal, and textile sectors. A targeted approach for these organizations shows promise. Indian banks will see a decrease in gross NPAs by the end of 2023-24.
Future Outlook and Industry Trends
According to a study by Assocham and CRISIL Ratings, NPAs in the corporate segment are projected to decline from 16% in March 2018 to 2% by the end of the fiscal year 2023-24. This will be the lowest level since 2013, at 3.40%. The asset quality of Indian banks has gradually improved since 2018, following a deterioration in the early part of the last decade.
Conclusion
NPAs, or non-performing assets, refer to assets where the interest has remained unpaid for 90 days. These assets negatively impact banks, reducing their profitability and potentially leading to the collapse of the banking sector. India ranks 5th globally in managing NPAs. To address the NPA problem in Indian banks, measures such as holding senior executives accountable, implementing proper governance, and enacting strict government laws can be taken. Banks can either keep NPAs in their books, hoping for recovery or make provisions for them. Alternatively, they may write off the loans entirely as bad debt. However, assessing a bank’s performance involves considering various factors beyond NPAs.
Learn more about some other full forms:
| CTC Full Form | PF Full Form |
| UTR Full Form | HDFC Full Form |
| NPCI Full Form | APBS Full Form |
| GNP Full Form | GPF Full Form |
| FII Full Form | IDBI Full Form |
NPA Full Form : FAQs
We need proper loan monitoring, restructuring, and recovery mechanisms to manage NPA.
The full form of NPA in a bank is Non-Performing Asset.
There is no specific amount for NPA; lower NPAs are safer for banks.
The role of RBI in controlling NPA involves implementing regulations, setting guidelines, and conducting inspections to ensure banks effectively manage and reduce NPAs.
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