Non-Performing Assets/ Stressed Assets | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS

Non-Performing Assets (NPA) and Stressed Assets

---

Definition

A Non-Performing Asset (NPA) is a loan or advance where:

• Interest and/or installment of principal remain overdue for more than 90 days in respect of a term loan.
• The account remains 'out of order' in respect of an Overdraft/Cash Credit.

Income Recognition

Income from NPAs is not recognized on an accrual basis. It should be recorded only when it is actually received.

Computation of Gross Advances, Gross NPA, Net Advances, and Net NPA

Example and Illustration:

Given:

• Total Advances = ₹1,000 crore
• Gross NPAs = ₹150 crore
• Provisions on NPAs = ₹60 crore

Formulas:

• Net Advances = Total Advances - Provisions
• Net NPAs = Gross NPAs - Provisions
• Gross NPA % = (Gross NPA / Gross Advances) × 100
• Net NPA % = (Net NPA / Net Advances) × 100

Calculation:

• Net Advances = ₹1,000 crore - ₹60 crore = ₹940 crore
• Net NPA = ₹150 crore - ₹60 crore = ₹90 crore
• Gross NPA % = (150 / 1,000) × 100 = 15%
• Net NPA % = (90 / 940) × 100 ≈ 9.57%

Asset Classification

• Standard Asset: Performing asset with no issues.
• Substandard Asset: NPA for < 12 months.
• Doubtful Asset: NPA for > 12 months.
• Loss Asset: Uncollectible and identified by internal/external auditors or RBI.

Provisioning Norms

• Standard Assets: 0.25% - 1%
• Substandard Assets: 15% (secured), 25% (unsecured)
• Doubtful Assets:
  • Up to 1 year: 25%
  • 1-3 years: 40%
  • Over 3 years: 100%
• Loss Assets: 100%

Writing Off NPAs

Writing off is an accounting action where NPAs are removed from the books, although recovery efforts continue.

NPA Management – Effective Mechanism

• Early Warning Systems
• Dedicated Recovery Teams
• Use of data analytics and granular monitoring
• Incentive-based recovery policies

Framework for Resolution of Stressed Assets

As per RBI guidelines, banks must classify and report stressed assets and follow the Prudential Framework for Resolution of Stressed Assets (June 7, 2019):

• Timelines for implementation
• Inter-creditor agreements (ICA)
• Resolution Plan (RP)

Prudential Norms Applicable to Restructuring

• Only viable accounts are eligible
• Asset classification continues unless performance is improved post-restructuring
• Provisioning of at least 10% in most cases

Other Aspects

• Insolvency and Bankruptcy Code (IBC)
• ARC involvement (Asset Reconstruction Companies)
• Compromise settlements

---

Multiple Choice Questions (MCQs)

1. What is the time threshold for an asset to be classified as NPA?
   • A. 60 days
   • B. 90 days
   • C. 120 days
   • D. 180 days
2. Income from NPAs is recognized:
   • A. On accrual basis
   • B. On cash basis
   • C. Monthly
   • D. Yearly
3. Which of the following is a Loss Asset?
   • A. Performing loan
   • B. NPA under 90 days
   • C. Uncollectible asset
   • D. Doubtful asset
4. Provisioning requirement for Doubtful Asset for more than 3 years is:
   • A. 40%
   • B. 100%
   • C. 15%
   • D. 25%
5. If Gross NPA = ₹150 cr, Total Advances = ₹1,000 cr, Gross NPA % is:
   • A. 1.5%
   • B. 15%
   • C. 10%
   • D. 5%
6. Which framework mandates resolution plans for stressed assets?
   • A. Basel III
   • B. Prudential Framework of June 7, 2019
   • C. CRR Guidelines
   • D. SLR Directives
7. ARC stands for:
   • A. Asset Recovery Council
   • B. Asset Reconstruction Company
   • C. Automated Risk Committee
   • D. Advance Restructuring Cell
8. Provisioning for unsecured substandard asset is:
   • A. 15%
   • B. 25%
   • C. 5%
   • D. 0.25%
9. ‘Out of Order’ status is applicable to which facility?
   • A. Term Loan
   • B. Bill Discounting
   • C. Overdraft
   • D. Housing Loan
10. Which is not a stressed asset resolution strategy?
    • A. Restructuring
    • B. Deferring NPA recognition
    • C. ARCs
    • D. IBC process