What is NPA ? What are the Loan classification norms ? What is Provisioning Coverage Ratio (PCR) ?
NPA = Non-Performing Asset
- Loans and advances given by the banks to its customers is are an Asset to the bank.
Just for the sake of simplicity, we can understand that a loan (an asset for the bank) turns as NPA when the EMI, principal or interest component for the loan is not paid within 90 days from the due date. Thus a Bad Loan is an asset that ceases to generate any income for the bank.
Asset or Loan Classification Norms
The assets or loans are classified as:-
- Standard Assets
- Sub-standard Assets
- Doubtful Assets
- Loss Assets
Now, in order to ensure that banks are not affected due to defaults, RBI has directed the banks to make provisions or set aside money when an account turns bad. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.
- A Loss Asset is considered uncollectible and of such little value for the bank in retaining the account on its book and ideally, such loans should be written off. Thus, Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for.
- Apart from above, there are Guidelines by RBI for provisions under special circumstances.
- ‘Unsecured exposure’ is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/RBI’s inspecting officers, is not more than 10%, ab-initio, of the outstanding exposure.
- ‘Exposure’ includes all funded and non-funded exposures.
- ‘Security’ are tangible security properly discharged to the bank and do not include intangible securities like guarantees, etc.
Restructuring of assets
- ‘Standard Assets’ upon restructuring –> ‘Sub-Standard Assets’ .
- Thus, NPA upon restructuring slips into further lower asset classification categories as per above table.
- Also, an NPA upon restructuring can also be up-graded to the ‘standard’ category after observation of ‘satisfactory performance’ during the specified period i.e. on repayment of outstanding amount by the borrower.
Provisioning Coverage Ratio (PCR):
- The ratio of provisioning to gross non-performing assets
- Indicates the extent of funds a bank has kept aside to cover loan losses.
- Related News: PSBs’ profits would have been wiped out were they asked to maintain 70% PCR
As per RBI guidelines, NPA is defined as under:
Non performing asset (NPA) is a loan or an advance where;
interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,
the account remains‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC),
the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
the instalment of principal or interest there on remains overdue for two crop seasons for short duration crops,
the instalment of principal or interest there on remains overdue for one crop season for long duration crops,
the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitization dated February 1, 2006.
in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).