All advances given by banks are termed “assets”, as they generate income for the bank by way of interest or instalments. However, a loan turns bad if the interest or instalment remains unpaid even after the due date — and turns into a nonperforming asset, or NPA, if it remains unpaid for a period of more than 90 days.
According to a July 2014 RBI circular, all advances where interest and/or instalment of principal remains due for more than 90 days, would be classified as a “nonperforming asset”. In case of overdraft or cash credit, if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for more than 90 days, it would be classified as an NPA.
In fact, if any amount to be received by the bank remained overdue for more than 90 days, it is classified as an NPA.
While The Indian Express on Monday reported on the sharp rise in the write-off of bad loans over the last three years — amounting to a total of Rs 1.14 lakh crore for 29 state owned banks — the RBI’s guidelines say that an NPA account will have to classified as a loss asset, and may be written off once the realisable value of the security, as assessed by the bank/approved valuers/RBI goes below 10 per cent of the outstanding.
It is important to note that if a borrower has several facilities with a bank, and if one of them turns into an NPA, then all the facilities granted by the bank will have to be treated as NPAs, and not just the part that has become irregular.