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In liberalizing economy banking and financial sector get high priority. Indian banking sector of
having a serious problem due non performing. The financial reforms have helped largely to clean
NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the
bank are highly affected due to this

NPA is defined as an advance for which interest or repayment of principal or both remain out
standing for a period of more than two quarters. The level of NPA act as an indicator showing
the bankers credit risks and efficiency of allocation of resource.



Various studies have been conducted to analysis the reasons for NPA. What ever may be
complete elimination of NPA is impossible. The reasons may be widely classified in two:

(1) Over hang component

(2) Incremental component

Over hang component is due to the environment reasons, business cycle etc.

Incremental component may be due to internal bank management, credit policy, terms of credit
etc.







The RBI has issued guidelines to banks for classification of assets into four categories.


 


These are loans which do not have any problem are less risk.

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These are assets which come under the category of NPA for a period of less then 12 months.

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These are NPA exceeding 12 months
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These NPA which are identified as unreliable by internal inspector of bank or auditor

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Non Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not been paid within
30 days from the due date. Due to the improvement in the payment and settlement systems,
recovery climate, upgradation of technology in the banking system, etc., it was decided to
dispense with 'past due' concept, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form
March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;

i. interest and /or installment of principal remain overdue for a period of more than 90 days
in respect of a Term Loan,
ii. the account remains 'out of order' for a period of more than 90 days, inrespect of an
overdraft/ cash Credit(OD/CC),
iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
iv. interest and/ or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purpose, and
v. any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.

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An account should be treated as 'out of order' if the outstanding balance remains continuously in
excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the
principal operating account is less than the sanctioned limit/ drawing power, but there are no
credits continuously for six months as on the date of balance sheet or credits are not enough to
cover the interest debited during the same period, these account should be treated as 'out of
order'.
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Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date
fixed by the bank.


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A 34

 is a debt obligation in which the borrower has not paid any previously
agreed upon interest and principal repayments to the designated lender for an extended period of
time. The nonperforming asset is therefore not yielding any income to the lender in the form of
principal and interest payments.[1]

For example, a mortgage in default would be considered a non-performing asset. After a

prolonged period of non-payment, the lender will force the borrower to liquidate any assets that
were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-
off the asset as a bad debt and then sell it at a discount to a collections agency