*Dr.P.Shanmukha Rao **Dr.N.V.S.Suryanarayana
The main function of the banking is to provide loans through various schemes acceptance of the deposits and to get interest from the prospective borrowers. Simultaneously the borrowers by having their required loans are starting their career and are being. In the same time unemployment problems are being solved to some extent. But if the banks after providing loans does not monitor or supervise the borrowers then many a times the loans become NPA(non-performing Assets). Under prudential norms, total advances or loans of a bank are classified under four segments depending on the performing of assets.Classification of Loan Assets
Performing Assets Non-Performing Assets
Standard assets Weak Assets
sub-standard doubtful loss
assets assets assets
Performing assets are assets, which do not carry any problems more than normal risk, attached to the business.
Standard Assets are those, which do not disclose any problem and which do not carry more than normal risk attached to the business.
Weak standard assets:
The accounts having the following irregularities are being treated as weak standard Assets.
¨ Accounts where interest and installment have not been serviced for more than one quarter.
¨ Continuous over drawings.
¨ Development of letters of credit.
¨ Invocation of guarantees.
¨ Accounts overdue for more than 4 months.
¨ No operation in the account.
Non- performing Assets are those loans given by a bank or financial institution where the borrower delays interest or principal payments. According to the RBI guidelines any loan repayment, which is delayed beyond 90 days, has to be identified as NPA. Banks are not allowed to book any income from NPA's. they have to make provisions for the NPA's or keep money a side, increase they can't collect from the borrower which affects profitability.
1. Sub standard assets:
Substandard assets are those, which have been classified as NPA for a period not exceeding two years. In such cases, the current net worth of borrower/guarantor or the current market value of the security charged to the bank is not enough recovery of dues in full. In other words such an asset will have well defined credit weaknesses that may jeopardize the recovery of the debt in full and there are district changes that the bank will sustain some loss, if the deficiencies are not corrected.
In case of term loans, where the terms of loan agreement regarding interest and principle have been renegotiated or rescheduled after commencement of production, should be classified as sub standard and should remain in such category for two years of satisfactory performing under the terms.
2. Doubtful assets:
Doubtful assets are assets, which have remained NPA for a period exceeding two years. As in the case of sub standard assets, here the rescheduling does not entitle a bank to upgrade the quality of the advance automatically. the loans of this category have all the weaknesses inherent in those classified as sub standard with the added characteristic that the weaknesses make collection in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Depending upon the period for which, the loan assets has remained doubtful 20% to 50% of the secured on the following basis.
If Considered doubtful: Upto one year 20%. One to three years 30%.
More than three years 50%.
3. Loss assets:
A loss assets is one where loss has been identified by the bank or internal auditors or the RBI inspectors, but the amount has not been written off wholly or partly. In the other words such an assets is considered uncollectible and have such little value that its continuance as a bankable assets is not warranted, although there may be some salvage value or recovery.
The loss assets requires 100% provisioning, as the value of the security is negligible.
Steps Taken By Banks To Reduce The Level of Npa
The huge amount of NPA not only reduces the yield on advances the but also reduces the profitability of the banks. The steps taken by the banks to reduce the level of NPA could be classified into two categories, namely, legal measures and non-legal measures.