What Is NPA And How to Contain It

What is NPA

An asset becomes NPA when it ceases to generate income for the bank.

NPA is a loan or an advance

Where interest or installment of principal remains overdue for a period of more than 90 days in respect of a term loan.

Where the account remains out of order in respect of an overdraft /cash credit account

Out of order means if the outbalance remains continuously in excess of the sanctioned limit or DP.

In case where outstanding balance in the principal operating account is less than the sanctioned limit/ DP , but there are no credits continuously for 90 days as on the date of BS date or credits are not enough to cover the interest debited during the same period.

Interest due and charged remaining unadjusted become overdue from the last day of the quarter, irrespective of interest charged at monthly intervals.

Substandard assets would be one which has remained NPA for a period less than or to 12 months.

An asset would be classified doubtful, if it has remained in the substandard category for a period of 12 months.

A loss asset is one where loss has been identified by the bank or internal or external auditors. When is a potential threat for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as fraud.

Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank

Or If the realizable value of the security, as assessed by the bank or approved valuer is less than 10 percent of the outstanding in account.

NPA is also a account where the regular/ adhoc credit limit have not been reviewed or renewed within 180 days from due date. Also the Drawings allowed against stock statement / book debts statements older than 180 days.

In Case of short term crop loan, account is NPA when the installment of principal or interest thereon remains overdue for two crop seasons

In case of long duration crops as NPA if the installment of principal or interest thereon remains overdue for one crop season.

How to deal with NPA _ By improving following key points bank may contain creation of NPA to a great extent.

Improvement of Quality of manpower, their integrity, their skill, knowledge about product, ability to understand capability, character and potential of loan seeker

Quality of management: Proper motivation, by promotion and by incentives

                         Proper training, allotment of work as per potential and as per will of the employees,

By Avoiding  target imposition, avoid loan melas, do not build pressure for credit growth in time frame fixed arbitrarily by bosses.

Quality of politics

Building pressure for financing in various government schemes, pressure for compromise settlement, write off of bad loans, for infrastructure projects, power distributing companies, power manufacturing companies etc where profit and repaying capacity of the project is not guaranteed.

In case account goes bad due to abnormal or natural reasons, government should support them from outside from a different body but not through bank, because it sends wrong message to good borrowers.

Strong administrative support to banks to deal with willful defaulters,

Quick legal action, disposal of cases in time bound programme, advising courts and tribunals to treat banks money as government money and punish those who do not side banks in nexus with defaulters

Proper manpower support to courts and tribunals,

Of audit and inspection, vigilance, risk management, loan assessment should be kept away from all outside influences and should not be victimized in way of transfer and rejection in promotions.

Other agencies Such as CA, Valuers, Legal experts, architects who cheat bank or who submit false and manipulated report should be punished.

Even internal audit teams are not free to write freely about a branch. External auditors, CAs, Rating agencies all are victim of illegal gifts and obligations offered by evil minded borrowers.

Adequate manpower and adequate time are not provided to auditors. They selected as per whims of bosses even if the person concerned is not talented

CAs for Concurrent audit or statutory audit are selected by evil bankers only.

Loan and charity cannot run together, from same platform

Banks have to become either a social welfare entity or totally a commercial entity, both cannot run together.

Private Banks work under totally a different and independent framework whereas PSU banks are subjected to several social welfare schemes.