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    Interest Payments: Non-Performing Asset?

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    Daman Deep Singh Arneja
    A non-performing asset (NPA) refers to a loan or advance for which the principal or interest payment is past due. Loans become NPAs if unpaid for 90 days or more. NPAs are classified into categories based on duration of non-payment such as standard assets, sub-standard assets, doubtful debts, and loss assets. It is important for banks to monitor NPAs because failure to generate interest income from non-performing loans negatively impacts their profitability and financial health.

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    Interest Payments: Non-Performing Asset?

    Uploaded by

    Daman Deep Singh Arneja
    33 views5 pages
    A non-performing asset (NPA) refers to a loan or advance for which the principal or interest payment is past due. Loans become NPAs if unpaid for 90 days or more. NPAs are classified into categories based on duration of non-payment such as standard assets, sub-standard assets, doubtful debts, and loss assets. It is important for banks to monitor NPAs because failure to generate interest income from non-performing loans negatively impacts their profitability and financial health.

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    A non-performing asset (NPA) refers to a loan or advance for which the principal or interest payment is past due. Loans become NPAs if unpaid for 90 days or more. NPAs are classified into categories based on duration of non-payment such as standard assets, sub-standard assets, doubtful debts, and loss assets. It is important for banks to monitor NPAs because failure to generate interest income from non-performing loans negatively impacts their profitability and financial health.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    33 views5 pages

    Interest Payments: Non-Performing Asset?

    Uploaded by

    Daman Deep Singh Arneja
    A non-performing asset (NPA) refers to a loan or advance for which the principal or interest payment is past due. Loans become NPAs if unpaid for 90 days or more. NPAs are classified into categories based on duration of non-payment such as standard assets, sub-standard assets, doubtful debts, and loss assets. It is important for banks to monitor NPAs because failure to generate interest income from non-performing loans negatively impacts their profitability and financial health.

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    Non-Performing Asset?

    A non-performing asset (NPA) is a classification


    used by financial institutions for loans and advances
    on which the principal is past due and on which
    no interest payments have been made for a period
    of time. In general, loans become NPAs when they
    are outstanding for 90 days or more, though some
    lenders use a shorter window in considering a loan
    or advance past due.

    A loan is classified as a non-performing asset when


    it is not being repaid by the borrower. It results in
    the asset no longer generating income for the
    lender or bank because the interest is not being
    paid by the borrower. In such a case, the loan is
    considered “in arrears.”

    Sub-Classifications for Non-Performing Assets (NPAs)

    Lenders usually provide a grace period before


    classifying an asset as non-performing. Afterward,
    the lender or bank will categorize the NPA into one
    of the following sub-categories:

     
    1. Standard Assets

    They are NPAs that have been past due for


    anywhere from 90 days to 12 months, with a normal
    risk level.

     
    2. Sub-Standard Assets

    They are NPAs that have been past due for more
    than 12 months. They have a significantly higher risk
    level, combined with a borrower that has less than
    ideal credit. Banks usually assign
    a haircut (reduction in market value) to such NPAs
    because they are less certain that the borrower will
    eventually repay the full amount.

     
    3. Doubtful Debts

    Non-performing assets in the doubtful debts


    category have been past due for at least 18 months.
    Banks generally have serious doubts that the
    borrower will ever repay the full loan. This class of
    NPA seriously affects the bank’s own risk profile.

     
    4. Loss Assets

    These are non-performing assets with an extended


    period of non-payment. With this class, banks are
    forced to accept that the loan will never be repaid,
    and must record a loss on their balance sheet. The
    entire amount of the loan must be written off
    completely.

    How NPAs Work

    Loans, as addressed above, are not switched into


    the NPA category until a considerable period of
    non-payment has passed. Lenders consider all of
    the factors that may make a borrower late on
    making interest and principal payments and extend
    a grace period.

    After a month or so, banks typically consider a loan


    overdue. It is not until the end of the grace period
    (typically, 90 days of non-payment) that the loan
    then becomes a non-performing asset.

    Banks may attempt to collect the outstanding


    debt by foreclosing on whatever property or asset
    has been used to secure the loan. For example, if an
    individual takes out a second mortgage and that
    loan becomes an NPA, the bank will generally send
    notice of foreclosure on the home because it is
    being used as collateral for the loan.

    Significance of NPAs

    It is important for both the borrower and the lender


    to be aware of performing versus non-performing
    assets. For the borrower, if the asset is non-
    performing and interest payments are not made, it
    can negatively affect their credit and growth
    possibilities. It will then hamper their ability to
    obtain future borrowing.

    For the bank or lender, interest earned on loans acts


    as a main source of income. Therefore, non-
    performing assets will negatively affect their ability
    to generate adequate income and thus, their overall
    profitability. It is important for banks to keep track
    of their non-performing assets because too many
    NPAs will adversely affect their liquidity and growth
    abilities.

    Non-performing assets can be manageable, but it


    depends on how many there are and how far they
    are past due. In the short term, most banks can take
    on a fair amount of NPAs. However, if the volume of
    NPAs continues to build over a period of time, it
    threatens the financial health and future success of
    the lender.

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