Non-Performing Asset (NPA)
Candlefocus EditorNon-performing assets are recorded on the balance sheet of a financial institution after a prolonged period of nonpayment by the borrower. This can indicate financial distress for the lender and may even lead to regulatory issues if significant levels of these assets accumulate over time.
To classify non-performing assets, lenders typically make use of a three-tier categorization - substandard assets, doubtful assets, and loss assets. Substandard assets are those with payment delinquencies less than 12 months, doubtful assets are 12-24 month delinquencies, and loss assets include those with delinquencies over 24 months.
When non-performing assets are recognized, lenders have several options to recuperate their losses. Taking possession of any collateral that was given, selling off the loan at a discount to a collection agency, or filing a legal action against the borrower to obtain a judgment for the unpaid amount are few among the various options available. In addition to these steps, lenders can try to engage the borrower in a workout agreement to restructure the loan and avert it from becoming an NPA.
Lenders can take these steps to try and limit the losses from their non-performing assets, but it is still a costly endeavor. That is why it is important for lending institutions to take measures such as screening of borrowers and adequate monitoring to ensure early detection of those assets which are at risk of becoming non-performing. With appropriate risk management strategies, institutions can minimize the amount of NPAs on their balance sheets and mitigate losses.