Why in news?
- HDFC Ltd. chairman has suggested a relaxation in non-performing assets (NPA) classification to a period of six months. He said, instead of 90 days, a loan should be classified as NPA if repayment is due for 180 days.
- He also suggested that the Reserve Bank of India (RBI) approve one-time restructuring of loans.
Why was this Recommended?
- It is a better solution to renegotiate payment timelines rather than getting into a legal tangle of force majeure. Unwinding from this legal mess will be very painful.
- Since banks were averse to risks, recommendations had been made to the RBI to directly purchase corporate bonds/commercial papers, as primary markets had died down.
What is a Non-Performing Asset (NPA)?
- A nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in arrears.
- A loan is in arrears when principal or interest payments are late or missed.
- A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.
How do Non-Performing Assets (NPA) Work?
- Nonperforming assets are listed on the balance sheet of a bank or other financial institution.
- After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement.
- If no assets were pledged, the lender might write-off the asset as a bad debt and then sell it at a discount to a collection agency.
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law that allows banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans.
- Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of SARFAESI Act, 2002.
- If borrower of financial assistance makes any default in repayment of loan or any instalment and his account is classified as Non performing Asset by secured creditor, then secured creditor may require before expiry of period of limitation by written notice.
- The law does not apply to unsecured loans, loans below ₹100,000 or where remaining debt is below 20% of the original principal.