[This article elucidates the gains of NPA recovery and the difference between Gross NPA and Net NPA]
An asset (loan and advances of the bank) becomes non-performing asset (NPA) when it ceases to generate income for the bank. If interest and or installment of principal amount of loan remain ‘overdue’* for a period of more than 90 days, of term loan or the account remain ‘out of order’** in case of overdraft/Cash Credit account or the bills purchased /discounted such accounts will be classified as NPA.
*Overdue means the unpaid amount due to the bank under any credit facility on due date. **An ‘out of order’ account is one in which the outstanding balance remains continuously in excess of the sanctioned limit/drawing power or the outstanding balance is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period.
Gross NPA: Gross NPA is the total amount of outstanding NPAs in the borrowal account, excluding the interest receivable. As per RBI regulation, once the account is classified as NPA interest cannot be debited to the NPA account and apportions it as profit. Therefore, banks will record the interest receivable from the NPA account in a separate book and recover the same once the account is regularized by the borrower.
Net NPA: The Reserve Bank of India defines Net NPA as Gross NPA minus (i) to (iv) the following- (i)Balance in Interest Suspense account + (ii) DICGC/ECGC claims received and held pending adjustment + (iii)Part payment received and kept in suspense account + (iv) Total provisions held.
The implication of NPAs for Banks:
Banks are required to set aside a portion of their operating profit as provision. Higher level of NPAs will increase the amount of provision thereby impacting the profitability of the lender. This will in turn adversely affect the Net Interest Margin (NIM) and also capital adequacy ratio of the bank. NPA recovery leads to multiple gains to the bank. Every Rupee recovered adds up cost-free resources to the bank. The recovered money can be recycled for further lending which enhances the current earning of the bank. The operating and net profit of the bank would improve. The capital structure of the bank would be strengthened. Recovery in NPA accounts improves the efficiency and profitability ratios of the bank and thereby improves Bank’s rating.