The loan or advances are assets for banks as they are the primary source to generate income. They are of two types: (1) Performing Assets and (2) Non-Performing Assets.
Performing Assets
When the borrowers are served the loan installment and interest in time without delay, such loan accounts are known as Performing Assets.
Performing Assets generate income for the bank, pronounced as standard assets. Such loan accounts are known as Standard Accounts.
Standard Overdue Accounts
Some accounts have not been classified as non-performing assets but always remain overdue due to recovery/payment irregularities; such accounts are known as Standard Overdue Accounts. Standard overdue accounts are reflected as potential non-performing assets for banks. Standard overdue accounts have been subcategories into Special Mention Accounts (SMA) as mentioned below,
SMA 0: Principal or interest payment or any other sum outstanding, in whole or in part, between 1-30 days.
SMA 1: Principal or interest payment or any other sum outstanding, in whole or in part, within 31-60 days.
SMA 2: Principal or interest payment or any other sum outstanding, in whole or in part, between 61- 90 days.
Non Performing Assets
Assets become Non-Performing Assets (NPAs) when they do not produce profits for the bank. As per the following cases –
- When the installment or/and interest in Demand Loan or Term Loan accounts are not paid on the bank’s due date for more than 90 days, such an account is known as a Non-Performing Asset.
- When the bank’s cash credit or overdraft account remains out of order for more than 90 days, such an account is known as a Non-Performing Asset. Out of Order means the outstanding balance is higher than the set limit, or interest credited in the account is less than occurred interest.
- When the limit is not reviewed within 180 days from the due date of renewal or when the stock statement has not been issued for 90 days or more in case of cash credit accounts, or when the bill remains overdue for a period of more than 90 days from the due date of payment, in such scenario account become as a Non-Performing Asset.
- When the installment or/and interest for short duration crops remains overdue for two crop seasons, and when the installment or/and interest for long duration crops remains overdue for one crop season, such an account is known as a Non-Performing Asset for agriculture loans.
Each loan account is a performing asset at the time of loan sanction, but the account category slips from performing assets to Non-Performing Assets based on repayment.
Movement of Non-performing Assets
To analyze the effect of Credit Risk Management, different tools have been used by Public and Private Sector Banks over the years; it is necessary to find out the movement of Non-Performing Assets (NPAs) means NPAs increase or decrease. This helps the bank understand whether Credit Risk Management policies implemented by banks are going in the right direction.
Net NPA to Net Advances Ratio
Net NPA to Net Advances Ratio measures the bank’s loan book’s overall quality. Net NPA to Net Advances Ratio is the ratio between Net Non-Performing Assets and given loans. Higher Net NPA to Net Advances Ratio reflects the increasing lousy quality of loans. Banks are considering total net carry forwarded NPAs at the time of calculation Net NPA to Net Advances Ratio that means if huge NPAs in the past, then also its impact one can see in the present Net NPA to Net Advances Ratio.
Gross NPAs add during the Year.
Every Financial Year, the bank has to show details of performance, including Non-Performing Assets (NPAs), added during the Year, which shows the failure of the Credit Risk Management policy and recovery policy of banks.