An Explainer: Nonperforming Asset

A nonperforming asset (NPA) is an asset on which the borrower has defaulted on principal and interest payment for an unacceptably long period.

PropGuide Explains Nonperforming Asset

Banks earn back the money they lent out to borrowers when they get interest and principal amount payments in the form of equated monthly installments (EMIs) . An asset becomes a nonperforming, when it no longer generates income for a bank or financial institution that extended the loan.

The Reserve Bank of India (RBI) has various guidelines classifying an asset an NPA. Since 2004 onwards, one criteria used to classify an asset as nonperforming is that principal and interest payments were not made for 90 days.

When an asset becomes an NPA, depending on the norms, banks and financial institutions may insist that the borrower liquidates the assets that he pledged as collateral. However, in cases in which this does not apply, banks may write them off. If you had pledged your home as collateral when your bank extended mortgage loan, the bank will have claim over your home, if you default on the payment for a prolonged period.

In India, NPAs of banks have been rising in the recent past. On October 20, Prime Minister Narendra Modi said that the government would be infusing Rs 70,000 crore into public sector banks to help them tackle the problem of distressed assets.

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