A Non-performing asset (NPA) is defined as a credit

facility in respect of which the interest and/or

installment of Bond finance principal has remained
‘past due’ for a specified period of time. NPA is used by
financial institutions that refer to loans that are in
jeopardy of default. Once the borrower has failed to
make interest or principle payments for 90 days the loan
is considered to be a non-performing asset. Non-
performing assets are problematic for financial
institutions since they depend on interest payments for
income. Troublesome pressure from the economy can
lead to a sharp increase in non-performing loans and
often results in massive write-downs.
With a view to moving towards international best
practices and to ensure greater transparency, it has been
decided to adopt the ‘90 days’ overdue’ norm for
identification of NPA, from the year ending March 31,
2004. Accordingly, with effect from March 31, 2004, a
non-performing asset (NPA)is a loan or an advance
where;
 Interest and/or installment of principal remain
overdue for a period of more than 91 days in respect
of a term loan,
 The account remains ‘out of order’ for a period of
more than 90 days, in respect of an Overdraft/Cash
Credit (OD/CC),
  The bill remains overdue for a period of more than
90 days in the case of bills purchased and
discounted,
 Interest and/or installment of principal remains
overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance
granted for agricultural purposes, and
 Any amount to be received remains overdue for a
period of more than 90 days in respect of other
accounts.
 Non submission of Stock Statements for 3
Continuous Quarters in case of Cash Credit Facility.
 No active transactions in the account (Cash
Credit/Over Draft/EPC/PCFC) for more than
91days
Further classify non-performing assets further into the
following three categories based on the period for which
the asset has remained non-performing and the
realisability of the dues:
1. Sub-standard assets: a sub standard asset is one
which has been classified as NPA for a period not
exceeding 12 months.
2. Doubtful Assets: a doubtful asset is one which
has remained NPA for a period exceeding 12
months.
3. Loss assets: where loss has been identified by
 the bank, internal or external auditor or central bank
inspectors. But the amount has not been written off,
wholly or partly.
Sub-standard asset is the asset in which bank have to
maintain 15% of its reserves. All those assets which are
considered as non-performing for period of more than
12 months are called as Doubtful Assets. All those
assets which cannot be recovered are called as Loss
Assets.
Reasons for Occurrence of NPAs
NPAs result from what are termed “Bad Loans” or
defaults. Default, in the financial parlance, is the failure
to meet financial obligations, say non-payment of a loan
installment. These loans can occur due to the following
reasons:
 Usual banking operations /Bad lending practices
 A banking crisis (as happened in South Asia and
Japan)
 Overhang component (due to environmental
reasons, natural calamities,business cycle,Disease
Occurrence,etc...)
 Incremental component (due to internal bank
management, like credit policy, terms of credit,
etc...)
The Problems caused by NPAs
NPAs do not just reflect badly in a bank’s account
books, they adversely impact the national economy.
Following are some of the repercussions of NPAs:
 Depositors do not get rightful returns and many
times may lose uninsured deposits. Banks may
begin charging higher interest rates on some
products to compensate Non-performing loan losses
 Bank shareholders are adversely affected
 Bad loans imply redirecting of funds from good
projects to bad ones. Hence, the economy suffers
due to loss of good projects and failure of bad
investments.
 When bank do not get loan repayment or interest
payments, liquidity problems may ensue.

The role and importance of non-bank financial

intermediaries is clear from the various functions
performed by these institutions. Major functions of the
NBFIs are as follows:
1. Financial Intermediation:
The most important function of the non-bank financial
intermediaries is the transfer of funds from the savers to
the investors.
Financial intermediation is economical and less
expensive to both small businesses and small savers,
(a) It provides funds to small businesses for which it is
difficult to sell stocks and bonds because of high
transaction costs,
(b) It also benefits the small savers by pooling their
funds and diversifying their investments.
2. Economic Basis of Financial Intermediation:
Handling of funds by financial intermediaries is more
economical and more efficient than that by the
individual wealth owners because of the fact that
financial intermediation is based on
(a) the law of large numbers, and
(b) economies of scale in portfolio management.
(i) Law of Large Numbers:
Financial intermediaries operate on the basis of the
statistical law of large numbers. According to this law
not all the creditors will withdraw their funds from these
institutions. Moreover, if some creditors are
withdrawing cash, some others may be depositing cash.
Again, the financial intermediaries also receive regular
interest payments on loans or investments made by
them. All these factors enable the financial
intermediaries to keep in cash only a small fraction of
the funds provided by the creditors and lend or invest
the rest.
(ii) Economies of Scale:
Large size of the asset portfolios enables the financial
intermediaries to reap various economies of scale in
portfolio management. The main economies are:
(a) reduction of risk through portfolio diversification:
(b)employment of efficient and professional managers;
and
(c) low administrative cost of large loans and
(d) low costs of establishment, information and
transactions.
3. Inducement to Save:
Non-bank financial intermediaries play an important
role in promoting savings in the country. Savers need
stores of value to hold their savings in. These
institutions provide a wide range of financial assets as
store of value and make available expert financial
services to the savers. As stores of value, the financial
assets have certain special advantages over the tangible
assets (such as, physical capital, inventories of goods,
etc.). They are easily storable, more liquid, more easily
divisible, and less risky. In fact, saving- income ratio is
positively related to both financial institutions and
financial assets; financial progress . induces larger
savings out of the same level of real income.
4. Mobilisation of Saving:
Mobilisation of savings takes place when the savers
hold savings in the form of currency, bank deposits, post
office savings deposits, life insurance policies, bills,
bond's equity shares, etc. NBFI provides highly efficient
mechanism for mobilising savings. There are two types
of NBFTs involved in the mobilisation of savings;
(a) Depository Intermediaries, such as savings and loan
associations, credit unions, mutual saving banks etc.
These institutions mobilise small savings and provide
high liquidity of funds.
(b) Contractual Intermediaries, such as life insurance
companies, public provident funds, pension funds, etc.
These institutions enter into contract with savers and
provide them various types of benefits over the long
periods.
5. Investment of Funds:
The main objective of NBFIs is to earn profits by
investing the mobilised savings. For this purpose, these
institutions follow different investment policies. For
example, savings and loan associations, mutual saving
banks invest in mortgages, while insurance companies
invest in bonds and securities.