What is NPA (Non-Performing Assets) Loan?

Loans are a major source of income for banks. But only if they are repaid within the agreed time. The loans with missed payments become a source of loss and have an increased chance of default. These loans officially become NPA or Non-Performing Assets if they remain overdue for 90 days or more. Recovery of NPA loans requires lenders to take different actions. This guide will help you understand the NPA in detail and enlighten you about its recovery and the rights of the borrowers.

What is NPA loan?

Let’s begin with learning how is a loan classified as NPA. NPA loan or Non-Performing Asset refers to a loan or credit that hasn't been paid for over 90 days.

Performing assets generate income for banks through interest and repayments. Loans generally fall into this category. However, when a borrower fails to make timely payments and the dues remain unpaid for 90 days or more, the loan stops generating income and is classified as a Non-Performing Asset (NPA).

The NPA definition of 90-day overdue is in alignment with the global standards and has been in effect from the end of the financial year, March 31, 2004.

What Happens after NPA?

Now, if the borrower is unable to pay the loan for over 90 days, then the question arises of how do banks recover NPA loans. To resolve this, there is a process of NPA loan resolution in India. It is a sequential procedure that may vary among lenders, but generally, here is how it goes:

Communication/Restructuring

The borrowers are notified about the overdue amount. It is done by sending an official notice to the borrower. They are also offered 60 days to settle the overdue amount.

This period is open to communication and negotiation for the borrower. They can state the reason and situation that limits them from making a payment to the lender. It will help develop a new loan plan based on mutual understanding or come up with any other solution.

Legal Action

This step involves the bank taking legal action against the borrower. This situation arises when the borrower neither repays the loan nor responds within the 60-day notice period sent for communication. The action can be taken at the following levels:

1. Court of Jurisdiction:

The lawsuit is filed in the court of jurisdiction, as already stated in the loan documents. Once the matter is heard, if the lender receives judgment in their favour, they get the right to seize or control the borrower’s property to satisfy the debt.

2. Debt Recovery Tribunal (DRT):

It was established under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act). The lawsuit can be filed here for quick redressal of the issue for both lenders and borrowers. It deals with overdue amounts exceeding 20 lakhs. After the hearings, if the judgment is in the lender's favour, the court may appoint a receiver for debt recovery by selling the borrower's assets.

3. Lok Adalats:

They were set under the Legal Services Authorities Act, 1987. Also referred to as People’s Court, these Adalats encourage compromise between borrowers and lenders. They deal with the overdue amount of INR 10 lakhs or more, thus, are a choice for smaller loans. There are also Mobile Lok Adalats that travel within India to resolve disputes.

4. SARFAESI Act:

It stands for Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. This Act is applicable only to secured loans. It enables financial institutions to recover the NPA loans by permitting them to sell the secured assets of defaulting borrowers. It does not require court intervention for the act. However, selling agricultural property is not permissible without court permission under this Act.

The role of the SARFAESI Act, 2002 is as follows:

• Securitisation of financial assets and the issue of security receipts by Asset Reconstruction Companies (ARCs)
• Reconstruction of financial assets is done by ARCs
• Enforcement of a security interest
• Other functions

Besides the mentioned RBI guidelines for NPA loan recovery, the RBI also focuses on the following aspects:

• Discourages banks from providing extra loans or any other services to individuals who intentionally avoid repayment
• Allows hiring a third-party recovery agent for collecting overdue payments through negotiation or legal action
• Offers more control and power to the banks through legal restructuring, such as the Insolvency and Bankruptcy Code (IBC)
• Provides funds to Public Sector Banks (PSBs) to deal with the losses

Options for Borrowers During NPA Loan Recovery

Though the borrowers need to repay the amount, there are certain flexibilities available for them, including:

• The lenders must provide a notice period for clearing the dues before proceeding with legal action. They must also be informed about the different loan repayment choices.
• The borrowers’ point of view, problems, or reasons about their inability to clear the dues in front of the court or the Debt Recovery Tribunal will be heard.
• The borrowers can report unfair treatment and even file a complaint, in this regard, against the lender. The complaint can be made to the police or the civil court.
• The borrowers have the right to know the overdue amount and other associated information, such as the interest rate, outstanding balance, and additional costs.

Conclusion

Understanding NPA is essential for both lenders and borrowers. The overdue payment for 90 days or more can result in the loan officially becoming NPA. Lenders can follow different recovery options to recover the amount. This is accompanied by the rights of the borrowers to protect them from unfair practices. For a borrower, it is recommended to avoid such a situation by making an informed decision and using effective planning prior to opting for the loan.

Also Read:
- How can an Advance Salary Loan help in times of financial need?
- How Business Loan for Expansion is Helpful for Entrepreneurs