Tuesday, 3 September 2019

Asset Classification-3 , Banking Fundamentals to Know for students.

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Asset Classification- 3 

A loan that is not producing its stated Principal and interest payments is an asset which is not producing income is called a Non-performing Asset (NPA).
A loan or an advance is classified as NPA as under:
Nature of Facility                                                           Parameters
1.Term Loan: Interest and/or installment of principal remains  overdue beyond 90 days
 2.Overdraft/Cash Credit above: Remains ‘out or order’  
 3.Bill Purchased/discounted: Remains overdue beyond 90 days
4.Crop Loans (short duration crops): Installments of principal or interest remains overdue for 2 crops
5. Crop Loans (Long-duration crops): Installments of principal or interest remains overdue for 1 crop

If 3 EMIs remaining unpaid continuously one after another, then there loan would fall in the category of NPA (over-dues for more than 90 days). The following three NPA categories of debtors is marked by delay/ avoidance/ resistance in payment of the overdue amount, due to their financial difficulty or as they are not interested to pay or other reasons.
Type of Asset: Standard Assets
Due for Features:    Paid back regularly                                     
* Give their interest and Principal installments on time.
*Called performing assets as they generate regular interest to the Bank and return the due Principal.
*Banks can earn profits.

Type of Asset: Substandard Assets
Due for Features: For more than 90 days but less than or equal to 12 months
*It is considered NPA
Type of Asset: Doubtful Asset
Due to Features: Sub-standard category for a period of 12 months
*It is considered NPA, Called doubtful since their recovery seems doubtful on the basis of the facts, conditions, and values of the security for the loan.
Type of Asset: Loss Assets
Due for Features: Considerable period of time
*Loss has been identified by the bank or auditors, or the RBI inspection
* The amount has not been written off wholly.
*Loss assets are considered not collectible.
*They are of little value as assets.
*However, there may be some recovery value in the long term, in some cases.

Accounts where there is erosion in the value of security/ frauds committed by borrowers: In the case of accounts where there are potential threats for recovery, these accounts should go through different stages of asset classification. If there is serious credit impairment, the assets must be classified as either doubtful or loss asset. If the realizable value of the security is less than 50 percent of the outstanding in the borrowed accounts, then such NPAs can be classified as under doubtful category.
Retail Banking

If the bank assesses that the realizable value of the security is less than 10 percent of the outstanding in the borrowed accounts, the asset should be classified as a loss asset. Because of the non-performance or non-receipt of interest and/or Principal, the Bank’s money in the form of funds gets blocked. Then, it is not available for further banking business and thus the profit the margin of the Banks goes down.

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