THE NOISE ABOUT THE NON-PERFORMING ASSETS - A LARGER PERSPECTIVE

THE NOISE ABOUT THE NON-PERFORMING ASSETS - A LARGER PERSPECTIVE

- Sridhar Kalyanasundaram

Background:

Many people keep writing on NPAs, without even having an understanding of the concept, and tend to apportion a blame on who is responsible for the situation being bandied about by the press which in turn seems to be feeding into the frenzy of more people taking their pens out, to draw NPA blood!!

Getting the Basics rights:

NPA – Non-Performing Asset – is exactly that.

It has stopped performing.

So, what is ‘performance of an asset?”.

It should generate “interest income to the lender”.

The “lender” can be anyone – a bank, an NBFC, a Fintech, or just about anyone.

So, if I borrow INR 1000/- from you, and did not even care to pay interest to you, then your lending to me is NPA – in your books, and soon will progress to a BAD DEBT if you cannot recover the sum lent to me. At that point of realization, you have no option but to write it off. (more on this, to follow!!)

How do Banks actually work on this NPA situation:

Banks do not have an option to consider what to do when, so the regulator – RBI here – has specified when a borrower is considered an NPA, and how he/it moves from SMA-0 to SMA-4 (Special Mention Account), and has specified what portion of the ‘accrued interest’ can be recognized as Income and what cannot be (under its Income Recognition and Asset Classification – IRAC - norms), and finally when and how the principal amount itself can be treated in the books of accounts, including the reporting of the same.