Types Of Non Performing Assets

Types Of Non-Performing Assets

Non-performing assets (NPAs) are of 3 types: 1. Substandard assets have payment defaults under one year, 2. Doubtful assets exceed one year with diminishing recovery chances, and 3. Loss assets are deemed wholly unrecoverable by banks or auditors.


What are Non-performing Assets?

Non-performing assets (NPAs) are loans, advances, and other bank assets that do not generate income. High levels of non-performing assets indicate asset quality and profitability issues for banks. These assets, which were once income-generating, are now non-yielding and have a negative impact on both lenders and borrowers. 

Non-performing assets (NPAs) can be categorized into three types: 1. Substandard assets, which are loans defaulted for less than a year, 2. Doubtful assets, which remain unpaid for over a year, and 3. Loss assets, considered entirely non-recoverable by financial institutions or auditors.

Substandard Assets

Substandard assets are loans that have not been paid back for a short time, usually less than a year. According to the rules of India’s central bank, the RBI, if someone hasn’t paid their loan for more than 90 days, banks call it a ‘substandard’ loan. These loans are risky because the borrower has started missing payments.

Though banks believe they can get back the money from these loans, they keep aside a small portion (15%) of the loan amount just in case they can’t. To get their money back, banks work hard, regularly checking in with borrowers. If the loan remains unpaid for a full year, it becomes even more doubtful for banks to get their money back.

Doubtful Assets

Doubtful assets are loans that haven’t been paid back for over a year. The RBI, India’s central bank, says that if a loan isn’t paid for a year after being labeled ‘substandard’, it’s called ‘doubtful’. As more time passes without payment, banks keep more money aside, expecting they might not get back the full amount: they keep 20% for 1-2 years, 30% for 2-3 years, and all of it (100%) if it’s unpaid for more than 3 years. 

These loans are very risky, and banks don’t expect to get all their money back. So, banks keep a close eye on these loans and sometimes even plan steps to get some money back. But if they still don’t receive any payment, they consider the loan a complete loss.

Loss Assets 

Loss assets are loans that banks believe they can’t get back at all. If the bank thinks they can only recover less than 10% of a loan, they call it a ‘loss asset’ as per the RBI rules. The bank then sets aside the full amount of that loan, meaning they expect not to get any of it back. This is called “writing off” the loan. 

Although the bank counts the loan as a total loss, they might still try to get some money back legally, even if the chances are very slim. Simply put, loss assets are loans where the bank has given up hope of getting their money back.

Reason For NPA

The different reasons and factors contributing to NPA are improper credit appraisal, industrial recession, adverse exchange rates, poor loan management policy, business failures, poor recovery of receivables, and a sluggish legal system.

Let’s look at some reasons for NPAs:

Poor Loan Checks

When banks don’t carefully check if someone can pay back a loan, they can give money to people who might not be able to return it. This happens when they don’t look closely at the borrower’s business plans or their past finances. If banks aren’t careful, they end up with unpaid loans.

Business Problems

Sometimes, businesses face tough times. Maybe people aren’t buying what they’re selling, or there’s an economic problem. When this happens, businesses struggle to make money and might not be able to pay back their loans. Banks can help by adjusting the loan terms during these tough times.

Money Troubles

There are lots of reasons a person or a company might run into money problems. It could be due to bad planning, disagreements in the family, or even workers going on strike. If these issues aren’t sorted out quickly, they might not be able to pay back their loans.

Too Easy Loan Rules

Sometimes, banks might give loans too easily, without checking if the person or company can pay it back. Just because someone is famous or a big company shouldn’t mean they get a loan without the usual checks. Everyone needs to show they can return the money.

Bad Economy

When the overall economy is down, like during a recession, people lose jobs, and businesses make less money. This makes it hard for them to pay back loans.

Bad Paperwork

Sometimes, the paperwork for a loan might have mistakes or isn’t complete. This can cause problems later when the bank tries to get its money back if someone isn’t paying. Proper documentation is important to make sure loans can be recovered if needed.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know:

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Types Of Non-performing Assets – Quick Summary

  • NPA stands for Non-Performing Asset.
  • NPAs are assets that have failed to generate income for their owners.
  • NPAs present financial challenges for both lenders and borrowers.
  • The main types of NPAs are Substandard Assets, Doubtful Assets, and Loss Assets.
  • The primary reason for NPAs is poor loan management policy.
  • Poor loan management could be due to a lack of proper credit appraisal, inadequate monitoring of loans, or poor recovery of receivables.

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Different Types Of Non-performing Assets – FAQs

How Many Types of Non-performing Assets Are There?

There are 3 types of Non-Performing Assets that include Substandard Assets, Doubtful Assets, and Loss Assets.

Which Assets are Non-Performing Assets?

NPAs are assets that have ceased to generate income or repayment for their proprietors. These include loans, advances, marketable securities, bonds, stocks, and foreclosure-acquired real estate properties.

What is the NPA classification in RBI?

The RBI classifies unpaid loans into three groups:

  • Substandard Assets – recently unpaid loans.
  • Doubtful Assets – long-unpaid loans with uncertain recovery.
  • Loss Assets – loans likely never to be repaid.

What Factors Lead to NPA?

The primary factor of NPAs is poor loan management. Other factors include economic decline, inadequate credit assessment, inadequate risk management, mismanagement and fraud, lack of recovery mechanisms, etc.

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