What are Non Performing Assets?

  • A non performing asset is a debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. It is therefore not yielding any income to the lender in the form of principal and interest payments.
  • For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
  • NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset.
  • These are problematic for financial institutions as these depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often result in massive write-downs
  • Categories of NPAs:
    • Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months.
    • Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months.
    • Loss assets: where loss has been identified by the bank, internal or external auditor or central bank inspectors. But the amount has not been written off, wholly or partly.