NPA refers to a classification of loans or advances made by banks or financial institutions that have stopped generating income or interest for the lender.
In simpler terms, it indicates the failure of a borrower to meet the agreed repayment obligations for a specified period.
Criteria for Classification: In India, the Reserve Bank of India (RBI) sets specific criteria for classifying loans as NPAs.
Generally, a loan is classified as an NPA if the borrower fails to make interest or principal payments for a period of 90 days or more, known as the "90-day rule."
The NPA ratio is the proportion of such NPAs in total loans.
NPAs have significant implications for banks and financial institutions.
When loans turn into NPAs, it indicates a decline in the borrower's creditworthiness and raises concerns about the lender's asset quality and profitability.
Banks need to make provisions against NPAs, which impacts their profitability and can strain their capital adequacy ratios.
Resolving NPAs is crucial for banks and the overall health of the financial system.
Banks employ various methods to resolve NPAs, including restructuring the loan, recovery through legal actions, selling the bad loan to asset reconstruction companies (ARCs), or writing off the loan as irrecoverable.
The RBI has implemented several measures and frameworks to address the issue of NPAs and improve the overall asset quality of banks.
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