NPA

A Perspective Note On NPA

A few months ago there was ruckus on the TVs and dailies when liquor baron Vijay Mallya suddenly disappeared from the country. So much so the news became cause celebre. Why? He owes 6000cr to 14 Public Sector Banks. The very loans he took from the government banks, which take a commoner to the task right from opening an account. Maybe that money is gone for good as the NPA.

When a bank gives a loan to an entity (borrowed this word from the previous article), the loan becomes an asset to that bank. Because it generates profit in the form of interest on the given amount (or principal amount, technically) for a given term(time period). But when a borrower misses paying back one time when the asset becomes a stressed asset. If the borrower doesn’t pay back three consecutive times after the loan period is over then it makes a Non-Performing Asset (simply, NPA).

The NPAs then affect the balance sheet in the form of bad loans at the end of the day. With wilful defaulters like Mallya rising unprecedentedly, the RBI pegged the NPAs of the banks at whopping Rs 3,61,731 Lakh Crore.

However, there is a way out for banks to save face. Banks can restructure the loans before they become irrecoverable. That is, banks can lower the interest rate of that loan and lengthen the repayment time period. It’s like gaining something over a bad loan is much better than losing it altogether. Either way, it affects the balance sheet and the performance of banks. And more importantly, it puts the depositor’s money at risk.

Moreover, as a policy framework banks are directed either directly by the RBI or indirectly by the Basel Framework to keep the Non Performing Assets to the minimum possible (something like below 10% of the total assets).

Latest Posts

No posts found