We all knows that recently a very large Scam took place in PMC Bank (Punjab and Maharashtra Co-operative Bank). The PMC bank scam and many earlier scams in banking sector are closely associated with the problem of NPA(s).
In this article we will discuss in detail about the Non-Performing Assets (NPAs).
To begin With 'NPA' are those assets of a bank or financial institution on which either the Interest or Principal remains due for more than 90 days. They are termed as Non-Performing because the bank has stopped earning any revenue on such accounts and hence are classified as bad loans in their balance sheets.
'NPA' can be due to various reasons including but not limited to failure of a business or a willful default by the borrower. The failure of a business contributing to NPA can be understood but NPA due to willful default by the borrowers is not acceptable.
HOW LOANS TURNS IN TO NPA? LET US UNDERSTAND
To understand how a loan turns in to NPA first off all we shall understand that the principal business of a bank is to do lending and borrowing and they borrows mostly from Public in the form of our deposits with the bank.
Banks earn income by lending at a higher rate as compared to borrowings. For Example banks provides interest rate of around 4 percent on Savings deposits and up to a maximum of 10 % on Fixed Deposits and then generally lends it for a higher rate of interest keeping its profit margin.
PROFIT OF BANK=LENDING RATE-BORROWING COST
BANK ASSETS = LOANS TO CUSTOMERS + OTHER ASSETS
BANK LIABILITIES= DEPOSITS OF CUSTOMERS + DEBT BORROWINGS + EQUITY SHARE CAPITAL
HENCE, ASSETS= LIABILITIES
It is clear from above that loans advanced by banks are the assets of banks and when borrowers defaults in its payment then they are termed as 'NPA' because bank is not earning adequate revenue on such accounts and hence are classified as 'NPA'.
STAGES OF NPA
But it is not like that if a person defaults today then his account will be declared as NPA tomorrow. As per the RBI guidelines there are different timelines for different types of credit facilities but in this article we will take a standard view of the same.
Broadly the accounts can be divided in to Standard Category and NPA Category:
RBI expects from banks that if borrowers has started defaulting in respect of its loans then the banks shall not wait to turn such accounts into NPA and take pro-active action.
Therefore RBI directed the banks to categorize such accounts which are irregular but are still standard into Special Mention Accounts (SMA) so that prompt corrective action can be taken in a timely manner to prevent their slippage in to NPA. Hence banks are required to take appropriate action by classifying such accounts as SMA.
But SMA is further sub- divided in to three categories:
i) SMA 0 (Special Mention Account 0)-These are those accounts in which the overdue period ranges from 0-30 days. This situation is not very serious as many times accounts get slip in to SMA 0 category and banks generally give a gentle message to customers to regularize such accounts.
ii) SMA 1(Special Mention Account 1)-These are those accounts in which the overdue period ranges from 31-60 days. The actual problem starts here when bank starts worrying that if due care is not taken then account may slip to NPA very soon.
iii) SMA 2(Special Mention Account 2)-These are those accounts in which the overdue period ranges from 61-90 days. This is the last stage of an account before turning NPA and is very crucial from bank's point of view because if the account is not regularized within 90 days then it will slip in to NPA category on 91st day.
As mentioned above that for the first 0-90 days of overdue the accounts remains standard despite being irregular but once it crosses the 90 days period then the account will be tagged as "NON-PERFORMING ASSETS".
If an account turns NPA then it is further subdivided into three categories:
i) Sub-Standard Accounts-An account which crosses 90 days period and remains in NPA category for a period of 12 months or less are termed as 'Sub-Standard Accounts'.
ii) Doubtful Accounts- The Accounts which remains in Sub Standard class for at least 12 months are termed as doubtful. Further they are divided in to D1, D2 and D3 i.e Doubtful 1, 2 and 3 category.
D1 category- If an account remains in doubtful category for 1 year it is termed a D1.
D2 category- If an account remains in doubtful category for 1 to 3 years.
D3 catefgory- If an account remains in doubtful category for more than 3 years.
iii) Loss Accounts- The account has already remained sub-standard and doubtful i.e NPA category for a long period of time now the RBI auditors or bank auditors can recommend to declare it as a loss account i.e fully written off.
WHY DO BANKS WORRIES OF AN ACCOUNT TURNING NPA?
There can be numerous reasons why banks worries about its accounts turning NPA but here we will discuss some of the major reasons for the same:
i) Loss of Revenue - If an account turns NPA then banks will have to stop charging interest on such stressed accounts.
ii) Higher Provisions - RBI has certain set of rules forcing the banks to make provisions at higher rate in case an account slips in to NPA. The banks are required to do provisioning on standard accounts as well but their rate is very less as compared to NPA accounts.
iii) Brand Image - It is a fact that higher NPA lead to decline in image of the banks and the management.
iv) Stock Market Crash - If a bank is a listed one then it might lead to fall in its stock market prices as well.
v) RBI Action - The RBI may also take some harsh actions in such cases.
We can understand that bank worries of their customers accounts turning NPA but why do Borrowers worries sometimes.
NPA can be due to various reasons including failure of business, economy crisis or even falsification of books. It must always be understood the reasons behind the same. Even when an account turns NPA banks mostly do its forensic audit to ascertain the genuineness behind the failure.
If the borrower is a willful defaulter then it might not impact his credibility but if it is due to genuine business failure then it will certainly have a huge impact.
LET US UNDERSTANDS THE IMPACT OF NPA ON GENUINE BORROWERS:
i) Brand Image- If an account turns NPA then the first and foremost impact is on the goodwill of the borrower.
ii) CIBIL Score-The CIBIL score is directly related with the credit worthiness and defaults made by the borrower. It will impact the CIBIL score of the customer.
iii) Problems in raising further funding- No other banks would sanction a loan to a Company/borrower whose account has turned NPA.
iv) Impact on other Group Entities- If an account turns NPA then it impacts not only the main borrower but also the group entities mathematics.
GROSS NPA Vs NET NPA
Most of us have heard the terms Gross NPA and Net NPA but many times are confused between the two.
For Example - A customer borrows a loan of Rs 10 cr, Paid back Rs 2 cr and Outstanding amount is Rs 8 crores. Bank has made a provision of Rs 2 cr till date.
Therefore Gross NPA will be Rs 8 cr
Net NPA=Gross NPA- Provision
Net NPA=8-2= Rs 6 Crore
The problem of NPA in India has grown at a very rapid pace in the past few years which has a direct impact on the economy. A bank is an institution of supreme national importance and it doesn't matter whether it is a Private Sector Bank or Public Sector Bank because first, it is a Public institution.
The latest PMC bank scam has proved that how growing NPA(s) are creating trouble for the retail account holders and the overall economy as a whole. It is the need of the hour to improve governance practices of the banks as well as the borrowers to put a curb on growing NPA(s).