How Does NPA Impact The Lending Culture Of Banks?

Introduction

NPA means Non-Performing Assets. It is an asset (loan) given by a bank on which the interest payments are overdue for more than 90 days. Major reason for NPA is wrong credit appraisal and sanctioning of loans. This leads to losses in interest and income that would have been expected from loan repayment. The provisioning requirement for NPAs was increased by RBI, which is equivalent to the loss in interest and income that would have been expected from loan repayment. Relevant clause of Banking Regulation (Amendment) Act, 2017 is as follows: “where the amount of such debt or part thereof remains unpaid for a period of more than ninety days from the end of a particular financial year, then, such debt shall be classified as non-performing assets;”. So, earlier by not being strict about the repayment criteria and being carried away by credit rating agencies, banks will be facing plenty of problems now

NPA means Non-Performing Assets. It is an asset (loan) given by a bank on which the interest payments are overdue for more than 90 days.

NPA stands for Non-Performing Assets. It is an asset (loan) given by a bank on which the interest payments are overdue for more than 90 days.

The NPA is shown in the books of accounts as a liability and it reduces the net worth of the bank.

The system needs a proper credit appraisal to minimize the chances of default and bad debt. Banks should not sanction loans without proper credit appraisal. Banks must take into account all factors like past repayment history, debt servicing capacity and viability of the project before lending moneyThe NPA is a problem for the bank because it reduces its ability to lend money and therefore impacts its profitability. Banks typically do not charge interest on NPAs since they are bad loans that cannot be recovered, but they do incur other costs related to these accounts such as legal fees and processing charges..

Major reason for NPA is wrong credit appraisal and sanctioning of loans. This leads to losses in interest and income that would have been expected from loan repayment.

If you are thinking of taking a loan, it is important to know how NPA has affected the lending culture of banks. There are a few factors that affect the lending culture of banks.

  • Major reason for NPA is wrong credit appraisal and sanctioning of loans. This leads to losses in interest and income that would have been expected from loan repayment.
  • Banks do not make loans without proper credit appraisal, which helps them avoid NPAs and reduce their bad debt expense in future.
  • Best practice for implementing such systems includes low-risk models like ‘Graduated Approval’, ‘Shifting Approval’ or ‘Lend To Own’.

The additional provisioning requirement will be applicable on all outstanding loans and advances as on March 31, 2017. According to RBI’s circular, banks have been asked to make additional provisioning of 15 percent in their books by end-March 2018.

The provisioning requirement for NPAs was increased by RBI, which is equivalent to the loss in interest and income that would have been expected from loan repayment. Relevant clause of Banking Regulation (Amendment) Act, 2017 is as follows: “where the amount of such debt or part thereof remains unpaid for a period of more than ninety days from the end of a particular financial year, then, such debt shall be classified as non-performing assets;”.

The provisioning requirement for NPAs was increased by RBI, which is equivalent to the loss in interest and income that would have been expected from loan repayment. Relevant clause of Banking Regulation (Amendment) Act, 2017 is as follows:

“where the amount of such debt or part thereof remains unpaid for a period of more than ninety days from the end of a particular financial year, then, such debt shall be classified as non-performing assets;”.

So, earlier by not being strict about the repayment criteria and being carried away by credit rating agencies, banks will be facing plenty of problems now.

So, earlier by not being strict about the repayment criteria and being carried away by credit rating agencies, banks will be facing plenty of problems now.

The stricter criteria for loan disbursement will help improve the quality of loans as well as bring transparency in lending practices. The RBI has also mandated that banks set aside a higher portion of funds for secured lending against borrower’s assets to ensure that there is no slippage in recovery.

Banks will have to strengthen their underwriting process and follow up on delinquent accounts aggressively if they want to avoid NPA risks from rising further.

The RBI has imposed a limit on the amount of loans that can be given to a single borrower. Banks now have to ensure that they do not lend more than 75% of their net worth or 5 times the annual average deposit in any single year to one borrower or group companies. The RBI has also issued guidelines for banks on how to treat wilful defaulters better.

The provisioning requirements are met from the profits earned and provisions set aside in previous years. If the changes in NPA provisions are substantial and cannot be covered by these sources, then banks may report huge losses and may need fresh capital infusion from government to maintain their regulatory capital ratios.

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Conclusion

In summary, banks should be cautious in lending to corporates with a high debt-equity ratio. They should also ensure that the loan amount given to companies is adequate for their core business activities and not just for expansion.

kwaku Amenorhu
Author: kwaku Amenorhu

Amenorhu kwaku is an author, internet marketer and entrepreneur. He is the founder of SuccessValley, a network community for students and aspiring entrepreneurs

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