How Do Banks Treat NPA?

Banks in India follow specific guidelines set by the Reserve Bank of India (RBI) when dealing with Non-Performing Assets (NPAs). Here’s a breakdown of the process:

Classification:

An asset is classified as NPA if the borrower fails to pay the principal or interest amount for a specific period. This period varies depending on the loan type, for example, short-term crop loans turn NPA after two overdue installments, while long-term crop loans turn NPA after one overdue installment.

Provisioning:

Banks are required to set aside a portion of their profits, called a provision, to cover potential losses from NPAs. The provision amount is determined based on the category of the NPA (substandard, doubtful, or loss). This helps banks maintain healthy financial records and absorb losses if the debt cannot be recovered.

Resolution:

Banks take various steps to recover the dues from borrowers with NPAs. These methods include:
Restructuring the loan: Modifying the loan terms (interest rate, repayment period) to make it easier for the borrower to repay.
One-Time Settlement (OTS): Negotiating a lump sum payment to settle the entire outstanding amount.
Legal action: Taking the borrower to court through Debt Recovery Tribunals (DRTs) or Lok Adalats (court-annexed dispute resolution forums) to recover the debt.

Write-off:

If recovery efforts fail, and the bank loses hope of getting back the money, the NPA is written off from the bank’s books. This essentially means the bank acknowledges the debt as unrecoverable. However, writing off doesn’t erase the borrower’s legal obligation to repay the loan.
It’s important to remember that a high level of NPAs can negatively impact a bank’s financial health and profitability. Therefore, banks actively manage NPAs through various strategies to minimize their impact and recover dues whenever possible.

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