Bonds - A look at what exactly an NPA is and how does it affect you as a bank customer

A majority of government-owned banks have seen a steep rise in non-performing assets (NPA) in the last couple of quarters. Let us look at what exactly NPA is and how does it affect you as a bank customer.

What is it?

For a bank, assets are loans that it gives to individuals and companies and gets regular income from it in the form of interest. When these assets stop generating regular cash flow (or become non-performing), they are known as NPAs.

How is it classified?

If a loan instalment is not paid for three months or 90 days, it is considered as an NPA. For example, if you have taken an education loan and have been unable to repay the interest or the principal amount for three months, the bank from where you have taken this loan will record it in its books as NPA. If an asset remains non-performing for a period less than or equal to 12 months, it would be classified as a sub-standard asset. These assets attract a provisioning, the money that a bank should set aside to cover potential losses, of 15%. If an asset remains in the sub-standard category for 12 months, it would be considered a doubtful asset with 25-100% provisioning.

When an asset is identified uncollectable then it is a loss asset which calls for 100% provisioning. When do NPAs rise?

To tame inflation, the Reserve Bank of India (RBI) has tightened the monetary policy 13 times since March 2010. When RBI increases its key policy rates, the banks raise lending rates or an increase loan tenor is possible. Soaring inflation and rising rates have seen the monthly budgets of many households go upside down. This has an immediate impact on the equated monthly instalments (EMIs). When many borrowers default, especially the ones with large credit dues, a bank’s profitability is hit. It needs to be noted here that a majority of NPAs for banks come from small and medium enterprises and companies.

What does it mean for you?

If you default and your loan turns into an NPA, the bank will try to recover as much as possible from you. For this, banks usually outsource recovery work to third-party debt recovery companies. Banks are also allowed to acquire assets if the borrower fails to repay. Further, non-repayment can affect your credit score and taking more loans may become a problem for you.

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