- 1 Non Performing Assets
- 2 Special Mention Account
- 3 Twin Balance Sheet Problem
- 4 Measures for Non Performing Assets Resolution
- 5 Bad Banks
- 6 FAQs Non Performing Assets
- 6.1 What constitutes a Non Performing Assets (NPAs)according to Indian banking regulations?
- 6.2 What are the classifications of Special Mention Accounts (SMAs) based on the duration of overdue payments?
- 6.3 What are the classifications beyond Non Performing Assets (NPAs), and how are they defined?
- 6.4 What measures and frameworks are in place for resolving Non Performing Assets (NPAs) and stressed assets?
- 6.5 What is the concept of a “bad bank,” and how does it function in the context of resolving Non Performing Assets (NPAs)?
- 6.6 What are the key regulatory mechanisms and institutions involved in managing Non Performing Assets (NPAs) and facilitating debt recovery?
- 7 More Articles
Non Performing Assets
Non Performing Assets is a loan/advance for which the principal or interest payment remains overdue for a period of 90 days. For Agricultural loans, the NPA is if the loan installment / interest is not paid for:
- Short duration crop loan: 2 crop seasons
- Long Duration Crops: 1 Crop season from the due date.
Special Mention Account
- Those accounts that show symptoms of bad asset quality in the first 90 days itself.
- The Special Mention Accounts are usually categorized in terms of duration as follows:
Here’s a breakdown of the Special Mention Account (SMA) classification based on the basis for classification:
| Special Mention Account Classification | Basis for Classification |
|---|---|
| Standard Accounts | Loans where principal and interest payments are made timely. |
| SMA – NF | Non-Financial (NF) signs of stress. |
| SMA 0 | Loan principal or interest is unpaid for 0 – 30 days from its due date. |
| SMA 1 | Loan principal or interest is unpaid for 31 – 60 days from its due date. |
| SMA 2 | Loan principal or interest is unpaid for 61 – 90 days from its due date. |
| Non Performing Assets | Loan principal or interest is unpaid for more than 90 days from its due date (classified as Non-Performing Asset). |
Here’s a breakdown of other classifications of loan accounts and their respective basis for classification:
| Classification | Basis for Classification |
|---|---|
| Substandard Asset | Account remains classified as an Non Performing Assets (NPAs) for 12 or more months. |
| Doubtful Asset | Account remains classified as a substandard asset for 12 months or more. |
| Loss Asset | Loan loss has been identified by the bank or RBI, but the amount has not been written off wholly. |
| Loan Write Off | Loan is written off from the asset side of the bank balance sheet. |
| Restructured Loan | When the principal, interest, or tenure terms are modified to enable the borrower to pay the loan. |
| Stressed Asset | Combination of Non Performing Assets (NPAs), loans written off, and restructured loans, indicating assets under significant stress. |
These classifications provide insights into the financial health and risk profile of loan portfolios, aiding banks and regulators in assessing and managing credit risk effectively.
Twin Balance Sheet Problem
The balance sheets of both public sector banks (PSBs) and some corporate houses private entities are in bad condition i.e. overleveraged and distressed private companies and the rising Non Performing Assets (NPAs) in Public Sector Bank balance sheets.
- Overleveraged companies: Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.
Measures for Non Performing Assets Resolution
Here’s a table summarizing the measures for Non Performing Assets (NPAs) resolution, including the 3R Framework and Sustainable Structuring of Stressed Assets (S4A), along with the K.V. Kamath Committee’s recommendations:
| Measure | Details |
|---|---|
| 3R Framework for Revitalizing Stressed Assets | |
| Rectification | Conducting Asset Quality Review (AQR) to identify and rectify issues leading to asset stress. |
| Restructuring | – Strategic Debt Restructuring (SDR): Allows for restructuring of distressed assets by converting debt into equity. – Scheme for Sustainable Structuring of Stressed Assets (S4A): Optional framework to identify sustainable and unsustainable portions of debt, converting unsustainable debt into equity. – Joint Lenders Forum: Collaborative platform for lenders to collectively address stressed assets and facilitate restructuring. |
| Recovery | Utilizing legal mechanisms like the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Insolvency and Bankruptcy Code (IBC), 2016, for asset recovery. |
| K.V. Kamath Committee on Restructuring of Loans Impacted by the Covid-19 Pandemic | Provides recommendations and guidelines for restructuring loans affected by the Covid-19 pandemic to mitigate financial stress on borrowers. |
| Sustainable Structuring of Stressed Assets (S4A) | – Optional framework for resolving largely stressed accounts and restructuring financial liabilities. – Bank engages independent agencies to assess the sustainability of stressed assets. – Unsustainable debt portions are converted into equity, ensuring no change of ownership unlike in Strategic Debt Restructuring (SDR). |
This table provides a structured overview of the measures for Non Performing Assets (NPAs) resolution, including the 3R Framework, the K.V. Kamath Committee’s recommendations, and the Sustainable Structuring of Stressed Assets (S4A) framework.
Bad Banks
A bad bank is a set up to buy the bad loans and other illiquid holdings of another financial institution and do the loan restructuring and absorb losses.
- Economic Survey 2016-17 suggested Public Sector Asset Rehabilitation Agency (PARA) to resolve the twin problems of ‘balance sheet syndrome’ (of the banks as well as the corporate sector).
- PARA is a proposed Bad Bank that will buy bad loans from public sector banks.
The key features and functions of Prompt Corrective Action (PCA), Asset Reconstruction Companies (ARCs), SARFAESI Act, Debt Recovery Tribunal (DRT), and e-Bkray Portal:
| Measure | Details |
|---|---|
| Prompt Corrective Action (PCA) | – Framework for banks considered risky based on capital ratios, asset quality, and profitability. – Restrictions include halting branch expansion, stopping dividend payments, and higher provisions. – Aimed at improving banks’ financial health and reducing risk. |
| Asset Reconstruction Companies (ARCs) | – Specialized financial institutions that purchase NPAs or bad assets from banks and financial institutions. – Helps banks clean up their balance sheets by offloading non-performing assets. |
| SARFAESI Act, 2002 | – Provides legal basis for setting up ARCs. – Allows lenders to take possession of mortgaged assets after giving a 60-day notice. – Not applicable to unsecured creditors or farm loans. – Enables recovery of dues from wilful defaulters. |
| Debt Recovery Tribunal (DRT) | – Allows lenders to recover dues by approaching DRT and obtaining a recovery certificate. – Enables lenders to take possession of borrowers’ properties and sell them to recover dues. – Appeals against DRT orders can be made to Debts Recovery Appellate Tribunal (DRAT). – Empowered to go beyond the Civil Procedure Code. |
| e-Bkray Portal | – Facilitates online auction by banks of attached assets. – Enhances transparency and efficiency in asset auctioning. – Aims to improve realization of asset value for creditors. |
This table provides an overview of key measures and mechanisms used in India for managing non-performing assets Non Performing Assets (NPAs), facilitating debt recovery, and improving the efficiency of asset management and realization.
FAQs Non Performing Assets
What constitutes a Non Performing Assets (NPAs)according to Indian banking regulations?
An Non Performing Assets (NPAs) is a loan or advance for which the principal or interest payment remains overdue for a period of 90 days. For agricultural loans, specific criteria apply based on the type of crop.
What are the classifications of Special Mention Accounts (SMAs) based on the duration of overdue payments?
Special Mention Accounts are categorized into different classes based on the duration of overdue payments, ranging from SMA 0 to 2, with each class representing a specific period of overdue payment.
What are the classifications beyond Non Performing Assets (NPAs), and how are they defined?
Beyond NPAs, loan accounts may be classified as Substandard Assets, Doubtful Assets, Loss Assets, or restructured loans, each with specific criteria based on the duration and nature of the asset’s performance.
What measures and frameworks are in place for resolving Non Performing Assets (NPAs) and stressed assets?
Various measures, such as the 3R Framework (Rectification, Restructuring, and Recovery), Sustainable Structuring of Stressed Assets (S4A), and recommendations from the K.V. Kamath Committee, are implemented to address Non Performing Assets (NPAs) and stressed assets.
What is the concept of a “bad bank,” and how does it function in the context of resolving Non Performing Assets (NPAs)?
A bad bank is an entity set up to acquire and restructure the bad loans and illiquid assets of financial institutions. The Economic Survey 2016-17 proposed the establishment of a Public Sector Asset Rehabilitation Agency (PARA) as a bad bank to address the twin problems of balance sheet syndrome in banks and corporate sectors.
What are the key regulatory mechanisms and institutions involved in managing Non Performing Assets (NPAs) and facilitating debt recovery?
Prompt Corrective Action (PCA), Asset Reconstruction Companies (ARCs), SARFAESI Act, Debt Recovery Tribunal (DRT), and e-Bkray Portal are some of the key mechanisms and institutions used in India for managing NPAs and facilitating debt recovery.
