When is an asset classified as NPA ?

by Posted on

Banks give out loans to people who need money. The loans that they extend are their assets because they help generate future cashflows. But sometimes, the person to whom the loan was given defaults and is unable to pay the money back. Then, the loan extended to him/her is no longer an asset for the bank. So, the bank needs to write it off and call it NPA( Non-Performing Asset).

The main concern is when to call it an NPA ?

Earlier, there were no strict rules regarding this and banks used this leeway to their advantage and didn’t report NPAs (not reporting NPAs will help them portray stronger financial statements).

But now, there is a 1-day norm in the picture. There is a misconception that this 1-day norm says that a loan will be classified as a NPA if payment is overdue for 1 day. This would be too aggressive !!!

Actually there is a timeline for these loans where they are classified under different accounts and finally transferred to NPA . The timeline is as follows :

(a) If the principle or interest payment is overdue for less than 30 days but shows signs of incipient stress, then classify it as Special Mention Account-0 (SMA-0).

(b) If the principle or interest payment is overdue for more than 30 days but less than 60 days, then classify it as Special Mention Account-1 (SMA-1).

(c) If the principle or interest payment is overdue for more than 60 days but less than 90 days but shows signs of incipient stress, then classify it as Special Mention Account-2 (SMA-2).

An account will be recognised as an NPA if the principle or interest payment is overdue for even 1 day after this 90 day period. This is what the 1-day norm actually mean !

Unknown's avatar

Published by Kashvi Gandhi

24 Thoughts

Leave a reply to air max 90 hyperfuse nike red dark grey grey premium Cancel reply