What are Non-Performing Assets (NPAs)?

In previous articles, we’ve talked a lot about the various types of loans and debts one might encounter in their day-to-day life. There are a million different ways in which these things may come about and every scenario will have its own ups and downs to deal with. But there’s one factor that we keep taking for granted in this equation. In all of our examples, we assume that the debtor is willing and able to pay back their loan… but this isn’t always the case. Every now and then, people won’t make their payments on time, and occasionally, they won’t make them at all. So where does that leave us? What happens when debts go unpaid and how do these kinds of things get resolved? Well, to answer those questions, we’ll need to do some research and ask ourselves – When do they occur? And how are they dealt with? What are Non-Performing Assets (NPAs)?

Non-Performing Assets (NPAs) is the classification used by lenders to identify loans/advances that are not being properly repaid. They are recorded on the lender’s balance sheet after a certain amount of time has elapsed and may lead to the liquidation of any collateral. 

In other words, when you take out a loan from the bank to pay for your new house, you and the bank will enter into an agreement that specifies how much money you’ll need to pay back and the manner in which you’ll do it (ie, a certain amount of money per month). You may also end up using the deed for the house as collateral so that the bank does not view the loan as being too risky. 

If you do not pay the money back according to this schedule, the bank will classify the loan as an NPA and will eventually liquidate the collateral (the house deed) in an attempt to mitigate their losses. 

Banks that have a large number of NPAs on their balance sheets may also be seen as financially unstable by regulators. 

When do NPAs Occur?

Missing the due date for one of your payments doesn’t immediately get it classified as an NPA. Rather, payments are usually considered to be NPAs only after a 90-day overdue period has passed. It should be noted, however, that this 90 day period is the time frame that is most commonly used and accepted, but it is not necessarily the rule. 

Individual loans and advances may have different NPA time limits depending on the specifics of the agreement.  

But there’s more to it than just that. NPAs can actually be subcategorized depending on the various factors at play. 

What are the Different Types of NPA?

NPAs are usually split into 3 different categories depending on the overdue time that has elapsed and the odds of the repayment ever actually taking place. These categories proceed as follows – 

NPA Classifications

This ranking system may make it seem like the bank will simply forget about an unpaid loan after enough time has passed – but it’s not that simple. Lenders have certain ways of getting their funds back even when the debtor has no intention of repaying them. 

How do Banks Deal with Non-Performing Assets?

When confronted with NPAs, lenders usually have 4 main options available to them – 

1. Use of Collateral – As mentioned, many lenders will often require some sort of collateral on the part of the debtor when they apply for their loan. If the debtor is unable or unwilling to pay back the money, the lender may be able to seize the collateral and sell it in an attempt to make their money back. 
2. Conversion into Equity – Lenders may attempt to convert their bad loans into equity in the hopes that appreciation will occur and eventually make up for their losses.  
3. Restructuring – If enough NPAs are accumulated and the bank begins to grow financially unstable, they may choose to redesign and hopefully improve the way in which they operate. This restructuring may limit losses and optimise future performance. 
4. Debt Buyers – If the bank becomes convinced that a debt will not be repaid, or that the money and effort required to reach the repayment will not be feasible, they may sell their bad debts to a debt buyer. Debt buyers purchase the bad loan for a fraction of the cost and attempt to collect the repayment themselves.

What is the Meaning of a Loan Moratorium?

Loan or Debt Moratoriums are essentially grace periods (usually provided by the government in the form of the legislature) that are afforded to debtors in times of crisis or during special circumstances. These moratoriums legally delay the repayment of debts for a certain period of time. 

An example of this practice could be seen in 2020 when certain businesses were given a 6-month grace period for paying off certain loans in order to alleviate the financial stress caused by the Covid-19 pandemic.

How do I Recover my NPA?

As noted, there are multiple paths open to lenders when it comes to NPAs that are not going to be paid, but what about NPAs that are still somewhat feasible? What exactly can a lender do about these types of debts? 

Well, these matters are usually settled in the Small Claims Court and the judicial system has a well-established order when it comes time to deal with such cases – 

• Consult an Attorney – While it is possible to deal with these legal matters yourself, there is a high degree of complexity that comes along with the debt collection process which makes it hard for a layman to deal with things personally. 
• Consult the National Credit Act – You’ll need to see if this act is applicable to your situation. If it is, there will be guidelines which highlight exactly how the recovery process should be pursued. 
• Letter of Demand – Oftentimes, simply sending a letter of demand to the infringing party is enough to bring them to the table. If you’re lucky, you may not even need to take the matter to court. 
• Summons – If the letter of demand does not work, you should be able to begin formal legal proceedings against the debtor. Depending on the response of the debtor, this issue will either be ‘defended’ or ‘undefended’.
• Undefended – If the debtor does not respond to the summons, the court will usually confirm a ‘default judgement’ in which the case is settled quickly. 
• Defended – If the debtor does respond with an intention to defend, they will have an opportunity to contest the claim. 
• Judgement is Enforced – If successful, the court should order the debtor to pay back the money that they owe. Alternatively, the court may order that their property be sold at a public auction in order to raise the necessary funds. 

This is just a rough idea of what to expect when you collect debts through the legal system. In actuality, there is a lot of extra paperwork and court appearances to go through which is why hiring an attorney is so vital for this kind of procedure. 

In Conclusion – What is an NPA and What can you do About Them?

A Non-Performing Asset (NPA) is a term used by lenders to describe debts that are not being properly paid back. In other words, if a debtor is unwilling or unable to pay back what they owe for an extended period of time, the loan will eventually be labelled as an NPA by the lender. 

Loans are usually marked as NPAs once they have been overdue for 90 days, although the exact time period involved is specific to the agreement in question. Eventually, NPAs will be subcategorised depending on the length of time they have been overdue and their odds of being repaid. The classifications proceed as follows – 

• Substandard Assets – NPAs that are less than 12 months overdue.
• Doubtful Assets – NPAs that are more than 12 months overdue.
• Loss Assets – NPAs that the lender believes will not be repaid. 

When dealing with NPAs, lenders will have various legal proceedings available to them. Once a letter of demand has been sent, the debtor may be summoned to court and, if successful, the court will order them to pay back the money that they owe. 

If they are unable to grant this request, the court may order that their assets be sold at a public auction in order to make up the amount that is needed.

Many lenders may also require that collateral be established when providing a loan so that the asset can be liquidised in the event that the debt is not repaid. 

Occasionally, the government may issue loan/debt moratoriums which can provide debtors with a limited grace period during which they do not have to make payments towards their debts. This is usually done during times of crisis to lessen the financial pressure on the afflicted group.

Disclaimer Finance101: All of our posts are for research purposes only. Finance 101 aims to assist its readers with useful information on the laws of our country that can guide you to make financial decisions that will enable you to become more financially independent in the future. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law & finance-related queries. Should you require specific legal/financial advice we advise you to get in touch with a qualified financial expert.

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