Non Performing Assets

NON PERFORMING ASSETS:

ABSTRACT:

In India Non-performing assets are one of the major concerns for banks. NPA is the best indicator of the health of banking industry. NPAs reflect the performance of banks. NPAs are the primary indicators of credit risk. NPAs are an inevitable burden on the banking industry. Hence the success of a bank depends upon methods of managing NPAs. The Public Sector Banks have shown very good performance over the private sector banks as far as the financial operations are concerned. The Public Sector Banks have also shown comparatively good result. However, the only problem of the Public Sector Banks these days are the increasing level of the non-performing assets. The non-performing assets of the Public Sector Banks

NPA is a short form of "Non -Performing Assets". In banking, NPA are loans given to doubtful customers who may or may not repay the loan on time. There are two types of assets viz. performing and non-performing, performing loans are standard loans on which both the principle and interest are secured and their return is guaranteed. Non-Performing assets means the debt which is given by the bank is unable to recover is called NPA. Non-Performing Asset (NPA) is a result of asset Liability mismatch, An NPA account in the books of accounts is an asset as it indicates the amount receivable from the defaulters. It means if any bank gives loans to the customer if the interest for that loan is not paid by the customers till 90days then that account is called as NPA account. A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as non-performing assets any commercial loans which are more than 90days overdue and any customer loans which are more than 180days overdue, more generally, an asset which is not producing income.

DEFINITION: An asset, including a leased asset, becomes Non-Performing when it ceases to generate income for the

Default, in the financial parlance, is the failure to meet financial obligations, say non-payment of a loan installment. These loans can occur due to the following reasons:

• Usual banking operations /Bad lending practices

• A banking crisis (as happened in South Asia and Japan)

• Overhang component (due to environmental reasons, business cycle, etc.)

• Incremental component (due to internal bank management, like credit policy, terms of credit, etc.)

THE PROBLEMS CAUSED BY NPAs:

NPAs do not just reflect badly in a bank’s account books, they adversely impact the national economy. Following are some of the repercussions of NPAs:

• Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses

• Bank shareholders are adversely affected

• Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments

• When bank do not get loan repayment or interest payments, liquidity problems may ensue.

• SPECULATION: Investing in high risk assets to earn high