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Asset Classification-1
Non-performing asset
Definition: A 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 assets: Assets
which has remained NPA for a period less than or equal to 12 months.
3. Doubtful
assets: An asset would be
classified as doubtful if it has remained in the substandard category for a period
of 12 months.
4. Loss
assets: As 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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