Context

In order to improve the health of the country’s banking sector, the government is exploring all options, including setting up of a bad bank.

About

What is bad bank?

• A bad bank buys the bad loans and other illiquid holdings of other banks and financial institutions, which clears their balance sheet.
• Currently, banks sell their bad loans to asset reconstruction companies as per the prudent norms of the Reserve Bank of India.

What is Non-Performing Asset?

• Non Performing Asset (NPA) is those kinds of loans or advances that are in default or in arrears.
• In other words, these are those kinds of loans wherein principal or interest amounts are late or have not been paid.
• These are also the kinds of loans where the lender considers the loan agreement to be broken and the receiver of the loan is unable to pay back the loan amount.

Types of NPA

• Standard Assets:It is a kind of performing asset which creates continuous income and repayments as and when they become due. These assets carry a normal risk and are not NPA in the real sense of the word. Hence, no special provisions are required for standard assets.
• Sub-Standard Assets:Loans and advances which are non-performing assets for a period of 12 months, fall under the category of Sub-Standard Assets.
• Doubtful Assets:The Assets considered as non-performing for a period of more than 12 months are known as Doubtful Assets.
• Loss Assets:All those assets which cannot be recovered by the lending institutions are known as Loss Assets.

When a loan is classified as NPA?

• Non Performing Assets are basically Non Performing Loans.
• In India, the timeline given for classifying the asset as NPA is 180 days. As against 45 to 90 days of international norms.