What are NPA’s (Non
Performing Assets):
A
mortgage in default would be considered non-performing, after a prolonged
period of non-payment(90 days).
The
lender will force the borrower to liquidate any assets that were pledged as
part of the debt agreement. If no assets were
pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.
Here is an example to help
you understand what NPA’s are and how Banks counter it-
Mr. X decided to start a business for that he
needed money (the fuel) , X had 25% of the money in his pocket, he decided to
go through the route of Initial Public Offering(IPO) to generate 25% more by offering his
company shares to public , the remaining 50% he borrowed from Lena bank by mortgaging his papa’s land.
Days passed and the
company started to do badly then to worse and the loan installments lapsed
month on month, Lena bank issued warning but X continued the bad practice for
more than 90 days (condition for NPA) and the bank labeled X as
defaulter and the loan as a Non Performing Asset.
Now what X will do?
He could take his
case against the bank to Debt recovery tribunal (DRT- A court for such cases).
What are Lena bank’s
options?
In 2002, Govt. gave bank’s a lifeline called as SARFAESI Act (Securitization and Reconstruction of Financial Assets and
Enforcement of security interest Act)
With this Act Lena bank
has the power to take possession of Mr.X’s property or can transfer this to
some other ownership.
What bank will do with
the acquired property?
- Bank can use this for their own purpose like , opening a new branch on it, installing of ATM’s etc.
- Bank can advertise in newspapers for the auction of the property acquired and could auction them on any pre decided day.
- Bank can sell the property to ARC (Asset Reconstruction Company), these are registered companies under RBI, they buy such assets from banks and sell them at higher prices to gain profits.
NOTE- Total amount of NPA’s are around 4.4% of the
total assets of banks in India and expected to increase to 4.7% till the end of
FY’15
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