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[ NPA simplified ] : 1 Page covers it all !

By The Summarizers
⇛ What is NPA ?
  • As per Reserve Bank of India (RBI), 
    • an asset, including a leased asset,
    • becomes NPA (non performing asset) when it ceases to generate income for the bank.
  • It is a part of "Stressed Assets".
  • Also check NPA & Special Mention Accounts  (in summary)~ useful in Bank Audits.


⇛ What is Stressed Assets ?
⇛ How NPA ?

There are few reasons for a loan which becomes NPA :-
  • Crony Capitalisation :- It is the leniency by bank officials to corporates. You can also understand by this  ~ "the success of every business depends on close relationships between business people & government officials".
  • Delay in Asset Quality Review (AQR).
  • Bank's Board :- The role of bank's board should be assertive in their choice of the business model (right business framework).
  • Indian Banks are focused more on security (because of weak Information Technology & Infrastructure) rather than Projected Cash Flows in Credit risk assessment.
  • A small bank distracts with the collective action taken by large banks (like to give a loan to big company) which also indulge itself in giving loan without standalone analysis.
⇛ Before Resolving the NPA, it is more important to assess NPA first. Banks majorly uses these tools to assess the borrower credit rating ~

  • Loss Given Default 
    • This is the true assessment to estimate the expected loss on a particular loan. It is used by every bank to show the hidden aspects to the investors.
  • Interest Coverage Ratio 
    •  It indicates the ability of a Borrower to service the debt & repay the loan over a period of time.
    • It shows how many times interest expenses can be paid with Earning before interest & taxes (EBIT).
    • If you have taken loan, then bank insert terms in their legal documents mandating a minimum coverage ratios.
⇛ For Resolving NPA, more & more powers are delegated to RBI by government.

⇛ Methods for resolving NPA ~
The Last Lines :~
  • RBI is taking major steps for resolution of stressed assets from the banks balance sheet.
  • Healthy Banks attracts more Foreign Institutional Investors (FIIs).
  • And hence, more foreign funds will flow in India.

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