Bad Loans, NPAs and the IBC
What Bad Loans Are
A non-performing asset is a loan on which the borrower has stopped paying interest or principal for 90 days, and a large pile of them can cripple a banking system.
When a borrower misses payments for more than 90 days, the loan is classified as a non-performing asset (NPA).
Why it matters
Banks lend depositors’ money. If loans aren’t repaid, banks lose capital and lend less.
Categories
Loans are classed as substandard, doubtful or loss assets depending on how long they’ve been overdue.
Provisioning
Banks must set aside money against expected losses, which cuts profits.
A factory owner stops paying instalments, and the bank marks the loan as an NPA after three months.
Some can be recovered.
- An NPA is overdue by 90+ days.
- Losses reduce lending capacity.
- Loans are classified by severity.
- Banks must provision.
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