Non Performing Asset

For people who are associated/transact with banks the word NPA is not unfamiliar. People generally may not fully know the meaning or definition of a NPA. NPA is the abbreviation for NON PERFORMING ASSET. This in short refers to an asset which is not giving out any useful performance. Before analyzing this aspect of an asset let us briefly know what an asset is in this context.
It is part of banking that banks which accept deposits from the public lend the money so collected in order to generate sufficient income to meet the commitment of interest that is payable on the deposit and also to earn a reasonable profit not only to meet their operational costs but also earn a reasonable profit. While lending money, the banks also collect some sort of security be it gold, bonds, machinery, LIC policies, shares, immovable properties, etc., and all these and other forms of securities become the Assets of the financing bank. As stated above the intention of any bank lending money is to earn income by way of interest on the loan. This generation of income in short is the performance of the loan/asset.
If any borrower fails to re-pay the loan installments/fails to service the interest continuously over a period of time, then that particular account and the asset relating to that account become NON PERFORMING ASSET. As of now, in a loan account if three EMIs are not remitted continuously or interest for two quarters is not serviced continuously then that account will be classified as NON PERFORMING ASSET. It is the endeavor of all banks to keep the percentage of NPAs as low as possible because a high NPA percentage in the advance portfolio of any bank will send wrong signals to the public regarding the health of the bank. It also reflects on the procedure of scrutinizing the credit proposals, assessment of the borrower etc. . In short it reflects badly on the management of their credit portfolio. Once an account is classified as NPA, then the bank takes various steps to realize their dues and taking possession of the security and going for auction/sale of the asset are the important steps. This process of taking possession of the security is called "Foreclosure", and the entire process starting with issue of notice to the borrower to pay up the overdue amount is called "asset recovery" and "asset reconstruction". Whenever a bank earlier tried to realize its dues by taking possession of the security and going for auction, it had to follow the legal procedure. Banks could not take possession of the securities with out a court decree, the obtaining of which in itself was a time-consuming process. In fact, there are so many escape routes available for the defaulter, such as prolonging the litigation with adjournments, false claims etc., and even after decree going in for appeals etc. With a view to speed up the process and bring relief to banks and other financial institutions which were groaning under the burden of NPAs and also to bring in more teeth to the financial institutions in combating the menace of willful default, the government has brought in an institution called The Debt Recovery Tribunal through an Act of Parliament called the Recovery of Debts due to banks and other financial institutions Act 1993. This worked well for some time but people found loopholes in this also and the banks were back to square one in no time.