NPA is a loan or an advance where:
i)Interest and /or instalment of principle remain overdue for a period of more than 90 days in respect of a term loan ii)The account remains ‘out of order’ for a period of more than 90 days in respect of an overdraft or cash credit iii)The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted iv)Any amount to be received overdue for a period of more than 90 days in respect of other accounts. NPAs affect the operational efficiency which in turn affects profitability, liquidity and solvency position of banks. While gross NPA reflects the quality of loans made by banks, net NPA shows the actual burden of banks. Any loan on which interest or principle installment is not paid for more than 90 days would be reckoned as NPA. NPAs affect the economy both at the macro level and micro level. At the macro level, alarming degrees of NPAs have a detrimental effect on the macro economy. A high level of NPAs or loss could cause significant banking crisis or banking distress. This causes a serious liquidity and credit risk on the banking system, which unless managed effectively would jeopardize the same. Loan Defaults
Loan default occurs when a debtor has not made a scheduled payment, or has violated a loan condition of the debt contract. A default is a failure to pay back a loan, which in turn leads to losses to banks. A loan default occurs if the borrower is not competent to pay the installments or have taken loan with an intention of not paying back to the bank. The rate of increase in NPAs has remained high in spite of large quantum of accounts being written-off or recovered under the one-time compromise settlement schemes of individual banks. It is important to see the volume of assets going through restructuring. There were cases facing stress and turning into NPAs, but prompt action has helped to prevent further slippage. However, the NPAs in personal loans declined on a year-on-year basis. According to the RBI stability report, though the share of credit flowing to real estate has remained stable, NPAs have recorded a rise. To stay competitive, banks and other financial institutions require fully integrated solutions to support their lending and other credit processes. The study deals with the various reasons for loan defaults and the effect of Non Performing assets on the operational efficiency of the Bank and the various measures to be followed to overcome the losses due to NPAs.
1.2 STATEMENT OF THE PROBLEM
Nonperforming asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through liquidity or bank insolvency. When many borrowers fail to pay interest, banks may experience liquidity shortage. The three letters Strike terror in banking sector and business circle today. NPA is short form of “Non Performing Asset”. The recovery of loan has always been problem for banks and financial institution. Loan defaults are one of the main causes for NPAs. The bank needs to spend money in monitoring these loan defaults. A special provision has to be maintained to fund these defaults. This leads to losses to the bank in the event of default. In case of Undercapitalized banks it exceeds the Bank’s capital base. To come out of these first the bank needs to think is it possible to avoid NPA – which is not possible, then left is to look after the factor responsible for it and managing those factors.
1.3OBJECTIVES OF THE STUDY
To estimate the value of Non Performing Assets of the Bank. To identify the impact of loan defaults and NPAs on the liquidity, Profitability and the financial performance of the Bank. To estimate the value of losses in the event of default.
1.4 NEED OF THE STUDY
This report explores an empirical approach to the analysis of Non-Performing...