An asset, including a leased asset, becomes a non-performing asset when it ceases to generate income for the bank. A NPA is a loan or an advance where;
• The interest and/ or instalment of principal remain overdue** for a period of more than 90 days in respect of a term loan
• The Overdraft/Cash Credit account remains ‘out of order’ (the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days or where the outstanding balance is less than the limit but no credit has been received continuously for 90 days as on the Balance Sheet date).
• the Bill purchased and discounted remains overdue for a period of more than 90 days.
**Overdue- Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
INCOME RECOGNITION
Income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not credit interest income on any NPA on accrual basis. If any advance, including bills purchased and discounted, becomes NPA, the entire interest accrued and credited to income account in the past periods, should be reversed if the same is not realised. In case of leased assets, the finance charge component of finance income (as defined in ‘AS 19 Leases’ issued by the ICAI) on the leased asset which has accrued and was credited to income account before the asset became Non performing, and remaining unrealised, should be reversed or provided for in the current accounting period.
ASSET CLASSIFICATION
Banks are required to classify Nonperforming assets further into the following three categories based on the period for which the asset has remained Non performing and the record of recovery:
i. Substandard Assets- asset which has remained NPA for a period less than or equal to 12 months.
ii. Doubtful Assets- asset which has remained in the substandard category for a period of 12 months.
iii. Loss Assets- asset which is wholly considered as unrealisable and if of very negligible and identified as such by the bank or internal or external auditors or on RBI inspection but the amount has not been written off wholly.
If arrears of interest and principal are paid by the borrower, then the account to be treated as Standard Asset.