What are NPAs, so much in news?
NPAs (Non-Performing Assets) are the loans given by a bank/ financial institution where the borrower defaults
or delays interest or principal payments. Banks are now required to recognise such loans faster and classify
them as problem assets. Close to 16% of loans made by Indian banks are NPAs - very high compared to say 5
% in banks in advanced countries.

Banks are not allowed to book any income from NPAs. Also, they have to provision for the NPA i.e. keep money
aside in case they can't collect from the borrower.

How are NPAs classified?
In line with RBI, the bank loans are classified as performing and non-performing for income recognition and
provisioning. The criteria for classification are:

Performing / Standard Assets: Loans for which interest and principal are received regularly. It also includes
loans where arrears of interest and /or of principal do not exceed 180 days at the end of a financial year. No
provisioning is required for such loans.

Non-Performing Assets: As per RBI, any loan repayment which is delayed beyond 180 days has to be
identified as an NPA. They are further sub-classified into:

Sub-Standard Assets: Non-performing assets for not more than two years. Also, in cases where the loan
repayment is rescheduled, RBI has asked banks to recognize the loans as sub-standard at least for a year.

Doubtful Assets: Loans which have remained non-performing for a period exceeding two years and which are
not considered as loss assets. A major portion of assets under this category are `sick' companies referred to
the B.I.F.R. and awaiting finalization of rehabilitation packages.

Loss Assets: Are one where the loss has been identified but the amount has not been written off wholly or
partly. In other words, such an asset is considered uncollectible.

How do banks provide for NPAs?
The RBI has provisioning rules for NPAs i.e. banks have to set aside a portion of their funds to safeguard
against any losses due to impaired loans. The banks have to set aside 10 % of sub-standard assets as
provisions. The provisioning for doubtful assets is 20 % and for loss assets it is 100 %.

What is the magnitude of the problem?
As per RBI, gross NPAs are Rs 45,563 crore, about 16 % of the total loans. The net NPAs (gross NPAs minus
provisioning) are Rs 21,232 crore, about 7 % of advances. Though percent wise, the NPAs have come down
lately, in absolute terms they have grown, signifying that while new NPAs are being added, older dues are
being recovered too slowly. Eventually, increasing NPAs imply that the funds locked are not being used
properly or are not producing adequate returns. If a bank has high NPAs, it may be unable to earn enough to
pay depositors' interest or repay their principal.

What is evergreening or rescheduling of loans?
Sometimes, to avoid classifying problem assets as NPAs, banks give another loan to the co. to help it pay the
due interest on the original loan. While this allows the bank to project a healthy image, it actually worsens the
problems and creates more NPAs in the long run.

How to solve the NPA problem? What steps have been taken so far?
Banks need better credit appraisal systems so as to prevent NPAs from happening. However, once NPAs
happen, the problem can be solved only if there is enabling legal structure, since NPA recovery requires court
orders. With judicial delays, debt recovery takes a very long time.

Banks are now working on Debt Recovery Tribunals to solve this problem. An Asset Reconstruction Company,
has also been mooted for rehabilitating revivable NPAs and recovering funds out of unrevivable NPAs (gone
cases).
Experts have also suggested the concept of narrow banking, where only strong and efficient banks will be
allowed to give commercial loans, while the weak banks will take positions in less risky assets such as
government securities and inter-bank lending.