As the first quarter of the current financial year is coming to end, banks have started diverting more and more resources towards recovery of its loans, the minimum target line is “ avoid the account becoming NPA”.
For the borrower it is necessary to know when and how a loan account is tagged “NPA”
Every borrower account is an “Asset” of the bank and like any other asset in the industry, it has to perform, in contributing revenue to its top line.
Borrower account yields interest to the bank, which is its major item on the Profit and Loss account. According to the normal principles of accounting, income is accounted for on “accrual” basis. Therefore mere debiting Interest to the borrowers’ account should suffice in the case of any bank.
But prudent accounting norms require that every bit of Revenue/ income must be actually realized in cash. Mere loading interest to the loan account is “accrual”. It is therefore essential that all borrowers must actually pay the interest separately immediately.
[show_more more=”show more…” less=”show less…”]
Internationally income from the Non Performing Asset is not recognized on accrual basis, but on actual receipt basis. Therefore for banks take utmost precaution that their assets remain “performing” through out the year.
RBI has defined the term Non Performing Asset. Let us see how a borrower account is classified as NON PERFORMING.
- Cash Credit
Financial Parameters :
- Interest debited to the account remains overdue for a period exceeding 90 days.
- Accounts remains “ out of order”.
- Account is regarded as out of order, if the outstanding balance exceeds the sanctioned limits or Drawing Power, for continuous period of 90 days.
- Therefore if your account runs over the limit or over the borrowing power continuously for 90 days anytime during the financial year then your account is out of order and therefore NPA
- If the temporary enhancements are not regularized within the time limit of 90 days from the due date of such ad hoc sanctions will be treated as NPA
- Bank and its auditors will be watchful in the cases of accounts which are regularized near about the end of the year
- In the case of any cash credit or overdraft, if there the credits are not adequate to cover the interest charged. Thus your account may be well within the limit or fully secured by banks’s own deposit or even government securities like NSC etc, but if the amounts deposited are insufficient to cover the interest charged, it will be tagged as NPA
- Term Loans
- If the Interest as well as installments are overdue for a period exceeding 90 days.
- In the case of moratorium, if the interest due is not paid within 90 days from the date it falls due
Further Classification Of NPA
A non performing asset is classified as
- Sub standard
- Doubtful or
- Lost asset
Depending upon the period for which it is NPA
- Even if one of the accounts is NPA of a borrower, his all accounts will be treated as NPA. The classification is for the borrower, not account specific
- Classification is strictly based on history of recovery and not on the basis of security coverage or the net worth of the borrower or the guarantor.
- In the case of consortium advance, each bank will classify the advance as Performing or non performing depending upon the behavior of account in the respective member bank. Thus account may be regular in one bank but can be classified as NPA by the other
- Erosion of security by the reason of fraud etc, bank can classify the account as Lost asset directly bypassing the regular passage.
WHAT HAPPENS IF YOUR ACCOUNT IS CLASSIFIED AS NPA
- Banks are not allowed to recognize interest charged to any NPA account. However banks record such interest in memorandum account.
- Depending upon the further classification of NPA account into sub standard, doubtful or Lost asset, banks have to make provision for doubtful advanes.
- Once an account is classified as NPA banks stop supporting such accounts till entire irregularities are removed and the account remains as a Performing asset for next financial year