Non Performing Assets
- Non-performing assets are loans and arrears made by banks or other financial institutions that have a principal and interest payment delay of more than 90 days (NPA). In the most straightforward terms, a non-performing asset is any asset that, for an extended period of time, stops generating returns for its investors (NPA). The RBI reported that 10% or more of all loans have defaulted by September 2021.
What Are Non-Performing Assets (NPAs)?
- Assets that are no longer profitable for the bank are referred to as non-performing assets.
- Assets were previously classified as non-performing assets using the concept of “Past Due” (NPAs).
- A “non-performing asset” is a loan for which interest and/or principal payments have been “past due” for a predetermined period of time (NPA).
- “90 days’ overdue regulations” for recognising NPAs went into force for the fiscal year that ended on March 31, 2004, in an effort to conform to international best practises and encourage greater openness.
- Consumer loans that are more than 180 days past due and business loans that are more than 90 days past due are commonly categorised as nonperforming assets by banks.
- NPAs are defined as agricultural loans with unpaid interest, instalments, or principal after two harvest seasons.
- However, it shouldn’t go over two years. Any loan or instalment that has not been repaid after two years would be classified as an NPA.
Assets with a non-performing rating include:
- It is below average when the NPAs have fully developed after a year.
- The NPAs won’t likely have aged by more than a year.
- Loss assets are assets that have incurred losses but have not yet been depreciated by the bank or its auditors.
- Consider a January 1, 2015, company loan with interest and principle payments due every fifth of the month. The business hasn’t made any payments since January 2016 and is also past due on other obligations.
- The debt is categorised as an NPA if the funds are not received before April 5, 2016.
- If it is not redeemed by April 5, 2017, it is recognised as a dubious asset.
- If the repayment was past due as of April 5, 2017, the asset is classified as a dubious asset.
- If the bank decides that this business loan cannot be repaid, it classifies it as lost assets.
India’s Bank NPA Issue:
- NPA began to decline in FY 2018 as a result of the Reserve Bank of India and national government’s implementation of the Insolvency and Bankruptcy Code and the repeal of antiquated regulations like the 5:25 rule.
- The lockdown and coronavirus (COVID-19) outbreak were expected to cause an increase in past-due bills across the nation.
- The Reserve Bank of India predicted three scenarios for the fiscal year 2022 up through September 2021 based on the value for September 2020.
- In the base case, the GNPA-ratio would rise to a brand-new high of 13.5%.
- A “wilful defaulter” is any organisation that has purposefully disregarded its debts to the lender while having the resources to do so.
- The unit has not met its financial responsibilities to the lender in terms of payments and repayments, and it has diverted funds away from the intended uses of the lender and toward improper ones.
- Since the unit violated its payment/repayment commitments to the lender and syphoned off the money, neither the money nor any assets connected to the unit have been used for the stated purpose for which the loan was secured.
- The names of willful defaulters with outstanding debts of more than Rs. 25 lakh shall be provided by the banks to the Reserve Bank of India (RBI).
About SARFAESI law:
- The SARFAESI Act of 2002, which is referred to as “.. an act to regulate securitization and reconstruction of financial assets and enforcement of security interests, and to provide for matters associated with or incidental thereto,” allows for the creation of a central database of security interests based on property rights.
- SARFAESI stands for Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest.
- It enables banks and other financial institutions to recover loans by auctioning off defaulters’ homes or business property.
- This law led to the establishment of the first Asset Reconstruction Corporation (ARC) in India, ARCIL.
- Secured creditors (banks or other financial institutions) have the right to the enforcement of security interests under section 13 of the SARFAESI Act of 2002.
- The SARFAESI Act of 2002 must now be followed by all state and multistate cooperative banks, according to a decision by the Indian Supreme Court. Banks are now allowed to confiscate and sell defaulters’ property in order to reclaim their debts as a result of the Supreme Court’s historic decision.
Code on Bankruptcy and Insolvency:
- The Insolvency and Bankruptcy Code, 2016 (IBC), India’s bankruptcy law, aims to harmonise the existing framework by providing a single insolvency and bankruptcy law.
- An insolvent debtor is one who is unable to repay their debts.
- A individual or business files for bankruptcy when they are insolvent and unable to pay their debts.
- It establishes clearer and faster insolvency procedures to help creditors, like banks, recover debts and stop bad loans, which have a significant negative impact on the economy.
- All businesses, partnerships, and individuals must abide by this comprehensive insolvency law.
Bad banks:
- With the intention of purchasing subprime loans and other illiquid assets from other financial institutions, a company known as a “bad bank” was founded.
- If a company has a sizable amount of non-performing assets, it will sell those assets to the bad bank for the going rate.
- The original institution may be able to balance its books by transferring these assets to the bad bank, but it will still be required to take write-downs.
- Instead of just one financial institution’s risky assets, a bad bank structure may acquire them all.
- The Grant Street National Bank is a well-known example of a failing bank. In order to store the troubled assets of Mellon Bank, this firm was founded in 1988.
- The Republic of Ireland formed the National Asset Management Agency, a bad bank outside of the United States, in 2009 in response to its own financial crisis.
