NPA in banking, or Non-Performing Asset, refers to a loan or advance that has stopped generating income for the bank. According to provided information, Non-Performing Assets (NPAs) denote loans or advances provided by banks or financial institutions that cease to generate revenue for the lender due to the borrower's failure to fulfill payments on the principal and interest of the loan for a minimum of 90 days.
In essence, it's a loan where the borrower has defaulted. Let's break this down further:
Understanding NPAs
- Definition: A loan or advance where the borrower has failed to make interest or principal payments for a specified period.
- Key Trigger: The most common trigger is non-payment for 90 days.
- Impact: NPAs reduce a bank's profitability and can impact its financial health.
Detailed Explanation
The 90-Day Rule
A loan becomes an NPA when:
- Interest or principal payments remain overdue for more than 90 days.
Examples
- A business loan where the borrower has not made any payments in three months.
- A home loan where the borrower is three months behind on their EMI payments.
Why are NPAs a Problem?
- Reduced Profitability: NPAs don't generate income for the bank.
- Increased Risk: They increase the risk of financial instability for the bank.
- Capital Adequacy: Banks need to set aside capital to cover potential losses from NPAs, impacting their ability to lend further.
Solutions
- Restructuring Loans: Banks might restructure loans to make them easier for borrowers to repay.
- Recovery Process: Banks may initiate legal proceedings or other recovery mechanisms to recover the outstanding amount.
In summary, an NPA is a loan that isn't performing, leading to financial complications for the lending institution.
