Non Performing Assets

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NON PERFORMING ASSETS(NPA)
WHAT IS A NPA (NON PERFORMING ASSET)
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. Non-performing asset (NPA) shell be a loan or an advance where; i. interest and /or installment of principal 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, inrespect of an overdraft/ cash Credit(OD/CC), iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

'Out of order'
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account 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.

CAUSES FOR NON PERFORMING ASSETS
There are several reasons for an account becoming NPA.

* Internal factors
* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose. 2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. 6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. 8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc., 9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.,

External factors:

1. Sluggish legal system -

Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. 5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. 6. Government policies like excise duty changes, Import duty changes etc.,

OTHER FACTORS
1. Diversification of funds for expansion,modernization undertaking of new projects and also for helping associate concerns. This is coupled with recessionary trends and failure to tap required funds in the capital and debt market.

2. Business (Product, marketing, financial) failure,inefficient management, strained labor relations, inappropriate technology, outmoded machinery,technical problems and product obsolescence.

3. Recession, input and power shortage, priceescalation, accidents, natural calamities, external problems in other countries leading to non –payment of over dues.

4. Time and cost over run during project implementation stage.

5. Government policies like changes in excise duties,pollution control, poor credit...
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