Non-Performing Assets

Non-performing Assets
An asset, including a leased asset, becomes non-performing when it ceases to generate income for
the bank.

A non-performing asset (NPA) is a loan or an advance where;

1. Term Loan interest and/ or instalment of principal remains overdue for a period of
more than 90 days in respect of a term loan,
2. the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of
an Overdraft/Cash Credit (OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted (BP/BD)
4. the instalment of principal or interest thereon remains overdue for two crop seasons
for short duration crops (Agriculture)
5. the instalment of principal or interest thereon remains overdue for one crop season
for long duration crops (Agriculture)
6. the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction
7. 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

In case of interest payments, 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
‘Out of Order’ status
An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power for 90 days. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90 days as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same
period, these accounts should be treated as 'out of order'
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due
date fixed by the bank.

 An outstanding balance is money you borrow but don’t repay in full when it
becomes due.
 Credit is money in an account that is available for you
 Drawing power is the amount that a customer can withdraw from the total limit that
is sanctioned to him by the lending bank
 Sanctioned limit is the total limit allotted to a customer by the financial institution for
working capital requirements. This is the maximum amount that the borrowing
company can utilize. The limit is usually given at the time of commencement of credit
facilities after doing the credit appraisal of the borrower/company.
 Calculation of Drawing power is done as below:
Stock rs.100
Less: creditors rs. 20
Amount arrived rs.80
Less; Margin25% rs.20
Drawing Power rs.60
Examples:
Out Of Order

Example : The sanction limit in a cash credit account is Rs. 10,00,000/-. The loan was
given on 1st July, 2013 against stock with a margin of 25%. The borrower is required
to submit monthly stock statement by 15th of the succeeding month. The borrower
submitted stock statement for November, 13 as per which the stock was Rs.
15,00,000/- and creditors for goods Rs. 3,00,000/-. On receipt of this stock statement
let us say on 15th December, 13, the drawing power is calculated as follows:

Particulars Amount

(Rs.)

Value of stock 15,00,000

Less: Creditors 3,00,000

Value of paid stock 12,00,000

Less: Margin @ 25% 3,00,000

Drawing power 9,00,000

For simplicity sake, let us assume that the value of stock and creditors in each of the
subsequent stock statements were the same.

The outstanding in the above account from 16th December, 13 to 31st March, 14 varied
between Rs. 9,50,000/- to Rs. 9,90,000/- and the outstanding balance on 31st March,
14 was Rs. 9,90,000/-. During the above period, the borrower deposited Rs. 1,00,000/-
in the account and withdrew Rs. 60,000/-. The interest debited between January, 14
to March, 14 amounted to Rs. 40,000/-. Up to December, 13 the borrower regularly
paid the interest debited to the account.

From the facts of the above case, it may be seen that though the outstanding in the
account was less than the sanction limit during the above mentioned period, it was
always in excess of the drawing power during the period of more than 90 days as on
the date of the balance sheet. Therefore, the account became NPA on 15th March,
2014.

Modifying the above example, suppose the drawing power as per the stock statement
during the above period was more than Rs. 10,00,000/- and the total credits in the
accounts during the aforesaid period were Rs. 30,000/-. Therefore, the account
became NPA on 31st March, 2014 as the credits in the account were not sufficient to
 cover the interest of Rs. 40,000/- debited between January,14 to March,14. Further,
the unrealized interest of Rs. 10,000/- (Rs. 40,000/- minus Rs. 30,000/-) is required
to be reversed.

Example for a Regular Term Loan Account:

An advance of Rs. 6,00,000/- was given on 1st June, 2013 which is to be repaid in 60
monthly installments of Rs. 10,000/- each after a moratorium of 6 months with the
1st installment falling due on 31st December, 2013. The rate of interest is 12 % per
annum which is to be paid at the end of each month.

The amount outstanding in the account was Rs. 6,06,000/- as on 31st March, 2014. To
arrive at the overdue amount in this account, first the drawing power as on 31st March,
2014 should be calculated. Considering that the 1st installment of Rs. 10,000/- was to
be paid on 31st December, 2013, 4 installments were required to be paid by 31st March,
2014 together with interest debited at the end of each month. Therefore, the drawing
power in the account on the above date was Rs. 5,60,000/- and the overdue amount
Rs. 46,000/- which consists of 4 installments of Rs. 10,000/- each and interest of Rs.
6,000/-. This implies that the borrower paid interest debited at the end of each month
except March, 2014 and did not pay any of the installments and hence the account
became NPA on 31st March, 2014.