- loan lent by banks or FI whose principal and interest are delayed beyond 90 days
- ceases to provide a return to its investors for an extended period
Categorization of loans before they become NPA - Special Mention Accounts
| SMA 0 | SMA 1 | SMA 2 |
|---|
| Principal & interest not paid for 1-30 days | Principal & interest not paid for 31-60 days | Principal & interest not paid for 61-10 days ⟹ loan becomes NPA |
Classification of NPA
| Classification | Conditions |
|---|
| Sub Standard Assets | NPA for ≤ 12 months |
| Doubtful Assets | NPO for > 12 months |
| Loss Making Assets | Banks/auditors have identified loss but loss has not been written off |
Loan Waiver vs Loan Write Off
| Loan Waiver | Loan Write Off |
|---|
| banks do not expect payback of loans extended | lenders write off loans to clean up balance sheet |
| govt promises to pay on behalf of borrower | banks may pursue other means to get back loan + interest |
| banks must return collateral to borrowers | collateral can be auctioned off |
Impacts
- -ve impact on eco growth.
- ↑ interest rates ⟹ cost-push inflation
- Credit lending to small-scale sectors affected
- Indirect impact on inclusiveness
Steps taken against NPA
Strategic Debt Recovery
- banks temporarily take over mgmt of company and try to convert debt of company to equity
- banks hope to run functions of company to get back the loan value
- banks can also sell debt as equity in market
- but buyers not enthusiastic in buying shares of troubled company
Asset Quality Review
- recognizing true extent of NPAs
- 2013: RBI started AQR
- directed banks to recognize true extent of NPA and come clean on their balance sheets
Scheme for Sustainable Structuring of Stressed Assets
- debt to be classified as sustainable and unsustainable
- if sustainable debt atleast 50% of debt, this process was to be proceeded with
Bad Banks
- similar to Asset Reconstruction Company that will take up NPA of other public and private banks
- purchase bad loans from banks at market rate and try to obtain value out of them
Provisioning
- Net NPA: actual amount of loans classified as NPA
- Gross NPA: Net NPA + Provisioning against NPA
- gross NPA is focused on for policy making
- banks set aside portion of their capital to safeguard in case loans do not get recovered timely
- this action is called provisioning
- provisioning happens as per probability of timely recovery
- RBI wants banks to go for Expected Credit Loss method
- i.e. banks go for provisioning before the loss has actually been incurred
- banks postponing it as it reduces the amt available for banks to give loans