Thursday, 29 August 2019

Asset Classification-1 , Banking Fundamentals to Know for students.

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Asset Classification-1 
Non-performing asset


DefinitionA non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days from the end of a particular quarter. In simple terms, an asset is tagged as non-performing when it ceases to generate income for the lender.
Description: Banks are required to classify NPAs further into Substandard, Doubtful and Loss of assets.

1. Standard Asset. If the borrower regularly pays his dues regularly and on time; the bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.

2. Substandard assetsAssets which has remained NPA for a period less than or equal to 12 months.

3. Doubtful assetsAn asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

4. Loss assetsAs per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”


How assets are classified?
Assets of a bank are classified in terms of its repayment status. Standard assets, substandard assets, doubtful assets, and loss assets are classifications of asset quality. For a bank, classification of assets into different categories should be done taking into account credit weaknesses and the extent of dependence on collateral security for the realization of dues.

What is a standard asset?
Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

What is a substandard asset?
A sub­standard asset would be one, which has remained NPA for a period less than or equal to 12 months.  
What is a doubtful asset?
An asset would be classified as doubtful if it has remained in the sub­standard category for a period of more than 12 months. 
What is a loss asset?
An asset that is an NPA for a period of more than 36 months is treated as a lost asset. Such asset has been identified by the bank or internal or external auditors or by the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered no collectible.

Provisions
For SA's a bank has to maintain a general provision of .4% for all type of Loans and Advances, SA's are the Loans in which dues are paid regularly by the borrower.
Sub-Standard Asset: (from 90days to 12months)-provision of 15% of Secured Loans and 25% for Unsecured Loans on the outstanding amount.

Doubtful Assets:(1year to 3years)-provision of 25% for Secured Loan,100% for Unsecured Loan up to 1 year and  Provision of 40% for Secured Loan,100% for Unsecured Loan for 1-3 years and Provision of 100% for Secured Loan & Unsecured Loan for more than 3 years.

Loss Asset: If the Loan is not paid even after 3 years of being classified as Sub-Standard Assets, it may be identified as Loss Asset. In this case, a 100 % provision is required.

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