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Non-Performing Assets (NPA) | Types | Classification of NPA for Banks - YouTube
Channel: WallStreetMojo
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clicking the bell icon friends today we
have a topic that is non-performing
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asset a biggest problem right now in
India Indian banking system is facing a
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turmoil situation out here because there
is a hell lot of NPOs that's hitting
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them hard on their balance sheets so
let's understand what exactly this all
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about why this is the important thing
for the bank at large and not only banks
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but even the central bank the RBI is one
big chunk that is involved in handling
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such NPS because of its regulations so
non-performing assets it refers to you
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know classification classification of
what we call as the loans and advances
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okay in the books of the what we call a
lender in which there is no payment of
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interest and the principal have received
and are passed you so in most of the
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cases debt has been classified as the
NPA non-performing assets where the loan
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payment have been outstanding for
greater than 90 days take this number in
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mine in a very close way so in the term
sheets are probably the sanction letters
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of every loan the period of default
under which the loan will be classified
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as NPA are generally mentioned first you
know NPA is generally classified on the
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banks what we call as the bank's balance
sheet and the percentage of the NPA out
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of the total advances has become a vital
ratio for the banks to keep a check on
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before making the results public second
more than that is greater than 90 days
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where the payment is due on the bank's
loan and the advances move to and NPA
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third you know as you have noted from
the above you know from that particular
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screenshot this Bank of America has has
an NPA of around $4170
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million that has been accrued for
90 days or we'll take an example you
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have to understand for example let's say
there is a company called X Y Z and it
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has taken a loan of let's say $100
million from a bank let's say DCB
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bank on which it needs to pay let's say
$10000 this is $100
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million okay take that in head and 10000 is the interest that is
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supposed to be paid every month for 5
years now on the borrower's default on
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the bank for three consecutive months
that has 90 days and the bank needs to
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classify the loan as NPA in the balance
sheet for the financially oh okay I hope
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with this particular idea example you
must have got the idea now what exactly
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are the types of NPA let's lower most is
the term loans now a term loan is the
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plain vanilla debt facility you know
will be it will be treated as an NPO and
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the principal or the interest
installment of the loan has been due for
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greater than
90 days it's a plain vanila debt second
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cash credit or OD which is known as your
overdraft facility now when we talk
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about this you know as a crack cash
credit or an autotroph and remaining
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past tube let's say for 90 days it can be
treated as NPA third there are thing
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called agricultural advances now
agriculture advances that have been
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passed you for more than two crops seize
it for short crop duration or one crop
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duration for long duration groves so
there could be various other types of
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NPA including the residential mortgage
home equity loans credit card loans non
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credit card outstandings and direct and
indirect consumer loans so it is
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possible there now let's do
classification of NPA
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for banks now banks are required to make
such standards of standardization of the
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non-performing asset into the fourth brought categories the first category that
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starts is the standard assets now these
standard assets are those assets which
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have remained as an NPA for the duration
greater then what we call as 12
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months or for a period of 12 months or
less than 12 months okay equal to
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the grater sign has to be removed less
than equal to12 months and the risk
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of the asset is what we call as normal
there's no problem in that then the
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another is called the substandard assets
now for the period of more than 12
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months the non-performing assets
classified when we say greater than 12 m
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it is classified as substandard assets
and this kind of advances possesses more
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than normal risk so you can say greater
than in risk such kind of advance they
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are targeting the credit worthiness of
the borrower and it's quite weak and
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banks are generally ready to take some
haircut on the loan amount we know which
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are categorized under this asset class
third are called the doubtful debts now
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what exactly are the doubtful let's see
for a period which is extending let's
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say for greater than 18 month
non-performing assets come under the
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category of the doubtful debts so
doubtful debt itself means that the
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banks have is highly doubtful of the
recovery of its advances so the
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collection of such kind of advances is
highly questionable and there is a very
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least probability you can say that that
the loan amount can be recovered from
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the party and such kind of advances they
put the bank what we call as the
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liquidity and not only that but the
prestige under the Jeopardy or probably
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the inner turmoil state and the loss is
called the loss assets see the final
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classification of the non forming asset
is the loss assets where you know the
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loan has been identified either by the
what we call as Bank itself or by the
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external auditors now not only that
external internal audit also and that
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the loan amount collection is not
possible and the bank has to take our
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denth it's a perfect world in its
balance sheet and the bank in this case
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has to write off the entire amount of
the loan and amount outstanding or need
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to make provision for the full amount
which needs to be written off in the
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future now there are things bank need to
bear in the mind before making a loan at
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once the for thing is called the first
is called the character second is called
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what sort of collateral they are
offering the third whether the client is
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in a capacity to pay such loan fourth is
the some conditions or probably some
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constraints that you put so this are the
four things that they need to take care
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of now I quickly quickly run through
each and every one character you know
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the character of the borrower needs to
be judged and the willingness of the
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company to repay its debt you know it
needs to ponder upon so the management
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history revenue pipelines stock
performances media coverages of the
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company should be taken into
consideration to rightly make an opinion
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about the come now if we talk about
collateral the value of the collateral
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which has been pledged needs to be
assessed and you know proper valuations
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of such property as it should be done
keeping in mind the loan-to-value ratio
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which is known as your l2v ratio right
third is the capacity the
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see that the loans company's financials
and future revenues projections of the
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company should be analyzed by the bank
and also the existing lenders which are
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already on the company's balance sheet
needs to be studied very properly in
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order to get the right collateral before
providing the advance and the last is
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the condition at last the overall
environment in the market and the
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industry condition should be kept in
mind the external and the internal
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factors that can be a that can affect
the business in the future should be
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considered and needs to be analyzed in a
very detailed format so big credit
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analysis form
judges any company in the 4c parameters
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and they need to so that's the this is
it for the topic of NPA non non
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performing asset if you have learned and
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