A non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 90 days, but this can depend on the contract terms.
loans that are 90 days or more past due and still accruing interest, and
loans which have been placed on nonaccrual.
In India, non-performing loans are common in the agricultural sector where the farmers can't pay back the loan or the interest amount mainly as a result of losses due to floods or drought. Generally NPL problems are resolved in two ways:
Centralization – This happens when all the concerned parties including the banks, regulators and government get together to find solutions. This generally takes the form of a central organization/agency such as an Asset Management Company.
Decentralization – This approach involves steps taken by the affected banks. The decentralized approach is common for bad loans arising from bad lending. In this approach, the banks are left alone to manage their own bad loans by giving them incentives, legislative powers, or special accounting or fiscal advantages.
Worldwide, the most common and successful approach towards NPL management is the establishment of Asset Management Companies. These companies use public or bank funds to remove NPAs from the bank books. For example, the Korea Asset Management Corporation purchased as much as 80% of bad loans at market rate following the Asian crises. Now, there are several proactive measures that are being implemented:
Lack of any standard valuation methodology whereby financial institutions can set up resources for losses arising from NPL resolution.
Pressure on banks and financial institutions to understate their NPLs given the social, economic and political repercussions.
Unwillingness of banks to sell NPLs because of the costs associated with such an exercise, which could add to the NPL losses. This in turn could hurt their capital adequacy.
Issues of NPL.
Business opportunity
Many companies see a business opportunity in buying NPL's. Buying NPL's from financial institutions with a discount, can be a lucrative business. Companies pay from 1% to 80% of the total loan and become the legal owner. The discount depends on the age of the loan, secured/ unsecured, age debtor, personal/ commercial debt, area of residence, etc.
Non-performing asset
A Non-performing asset is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In simple terms, an asset is tagged as non performing when it ceases to generate income for the lender.
