NewsX channel put out a wonderful expose on Non-Performing Assets (NPAs), after investigating several companies that have become NPAs. Over a period of 50 days, their team scanned the length and breadth of the country and unearthed some startling figures.
In a wide ranging discussion on various aspects of NPAs I am listing a few that I mentioned in this panel discussion.
What are NPAs?
Non-Performing Assets are those loans in a bank for which either the principal or interest are overdue for more than three months. These are required to categorize them to be one of the following three types – Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the sub-standard category for a period of 12 months.
- Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Evergreening of Loans
Many creative methods have been employed to not classify loans as NPAs. One of them is Evergreening. To understand this, look at Figure 1. ABC Company takes out a loan for Rs. 100 crores from Bank A at 10% interest. At the end of one year, ABC has to pay Rs.110 crores to Bank A. But for various reasons, ABC has not been able to come up with the money. So what does it do? ABC goes to Bank B and using the same assets takes out a loan for Rs.210 crores. Out of this, it pays out Bank A Rs. 110 crores and keeps Rs.100 crores for itself. The same plays out the following year when ABC takes an even bigger loan from Bank C to pay off Bank B. Every step of the way, Rs. 100 crores is accruing to ABC company but it is lost in kickbacks if the asset is either non-existent or doubtful. Once this circle gets broken, whichever Bank is having the last loan of ABC has an NPA on its hands.
But if it is a legitimate business, an Evergreen Loan is beneficial if used properly.
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