In the banking industry, loans become non-performing assets (NPA) when the borrower fails to repay the loan as per the agreed upon terms and conditions. In India, for instance, the Reserve Bank of India (RBI) has defined guidelines for the classification of loans as NPAs.
According to the RBI guidelines, a loan becomes an NPA if the borrower has not made any payments of principal or interest for a period of 90 days. This means that if a borrower has not made a payment for 90 days or more, the loan is considered to be in default and the lender must classify it as an NPA.
Once a loan is classified as an NPA, the lender must make provisions for the amount of the loan in their accounts, which means setting aside funds to cover any potential losses. The lender may also take legal action against the borrower to recover the outstanding loan amount.
The classification of a loan as an NPA can have significant implications for both the borrower and the lender. For the borrower, it can impact their credit score and their ability to obtain future loans. For the lender, it can result in a loss of revenue and increased risk to their financial health. It is therefore important for borrowers to make every effort to repay their loans on time and for lenders to carefully monitor their loan portfolios to identify potential NPAs early on and take appropriate action to minimize losses.
