Non-Performing Assets (NPA)

An asset, including a leased asset, becomes non performing when it

ceases to generate income for the bank.You may note that for a
bank, the loans given by the bank is considered as its assets. So, if
the principle or the interest or both the components of a loan is not
being serviced to the lender (bank), then it would be considered as a
Non-Performing Asset (NPA).

Any asset which stops giving returns to its investors for a specified
period of time is known as Non-Performing Asset (NPA).
Generally, that specified period of time is 90 days in most of the
countries and across the various lending institutions. However, it is
not a thumb rule and it may vary with the terms and conditions
agreed upon by the financial institution and the borrower.

Categories of Non-Performing Assets (NPAs)

Categories of NPAs Criteria

Substandard Assets An asset which remains as NPAs for less than or e

Doubtful Assets An asset which remained in the above category for

Asset where loss has been identified by the bank o

Loss Assets
not completely written off.
How serious is India’s NPA issue
compared to other countries?

● More than Rs. 7 lakh crore worth loans are classified as Non-
Performing Loans in India. This is a huge amount.
● The figure roughly translates to near 10% of all loans given.
● This means that about 10% of loans are never paid back, resulting in
substantial loss of money to the banks.
● When restructured and unrecognised assets are added the total stress
would be 15-20% of total loans.
● NPA crisis in India is set to worsen.
● Restructuring norms are being misused.
● This bad performance is not a good sign and can result in crashing of
banks as happened in the sub-prime crisis of 2008 in the United
States of America.
● Also, the NPA problem in India is worst when comparing other
emerging economies in BRICS.
Bank-wise Gross NPAs as of June 2017 (Rs in crore)

Bank NPAs Bank NPAs

State Bank of India 188,068 Indian Bank 9,653

Punjab National Bank 57,721 HDFC Bank Ltd. 7,243
Bank of India 51,019 Vijaya Bank 6,812
IDBI Bank Ltd. 50,173 Punjab & Sind Bank 6,693
The Jammu & Kashmir
Bank of Baroda 46,173 Bank 5,641
ICICI Bank Ltd. 43,148 Kotak Mahindra Bank 3,727
Canara Bank 37,658 IDFC Bank 2,004
Union Bank of India 37,286 The Federal Bank 1,868
Indian Overseas Bank 35,453 Karur Vysya Bank 1,807
Central Bank of India 31,398 The South Indian Bank 1,696
UCO Bank 25,054 The Karnataka Bank 1,691
Oriental Bank of Commerce 24,409 Yes Bank 1,364
 Axis Bank Ltd. 22,031 IndusInd Bank 1,272
Corporation Bank 21,713 The Lakshmi Vilas Bank 878
Allahabad Bank 21,032 City Union Bank 735
Syndicate Bank 20,184 RBL Bank 458
Andhra Bank 19,428 Dhanlaxmi Bank 354
Bank of Maharashtra 18,049 DCB Bank 285
Dena Bank 12,994 Total 829,338
United Bank of India 12,165

BREAKING DOWN Bad Debt

Bad debt is an expense that all businesses have to allow for. Companies that
make sales on credit often estimate the percentage of sales they expect to
become bad debt, based on past experience, and record this in the
allowancefor doubtful accounts, which is also known as a provision for
creditlosses.

Bad debt is generally classified as a sales and general

administrativeexpense and is found on the income statement.
Recognizing bad debt leads to an offsetting reduction to accounts
receivable on the balance sheet – though businesses retain the right to
collect funds should the circumstances change.

Direct Write-Off vs. Allowance Method

There are two different methods used to recognize credit losses. Using the
direct write-off method, uncollectible accounts are written off as they
become uncollectible, which is used in the U.S. for income tax purposes.

However, while the direct write-off method records the precise figure for
uncollectible accounts, it fails to uphold the matching principle used in

Calculating Bad Debt Expense Using

Allowance Method
Because no significant period of time has passed since the sale, a company
does not know which exact accounts receivable will be paid and which will
default. So, an allowance for credit losses is established based on an
anticipated and estimated figure. A company will debit bad debts expense and
credit this allowance. The allowance for doubtful accounts is a within
accounts receivable, which means that it reduces the loan receivable
account when both balances are listed in the balance sheet. This
allowance can accumulate across accounting periods and may be
adjusted based on the balance in the account.

Bad debt expense can be estimated using statistical modeling such as

default probability to determine its expected losses to delinquent and
bad debt. The statistical calculations can utilize historical data from the
business as well as from the industry as a whole.

The specific percentage will typically increase as the age of the

receivable increases, to reflect increasing default risk and decreasing
collectibility. Alternatively, a bad debt expense can be estimated by
taking a percentage of net sales, based on the company’s historical
experience with bad debt. Companies regularly make changes to the
allowance for credit losses entry, so that they correspond with the
current statistical modeling allowances.
 Conclusion

Individuals can also deduct a bad debt from their

taxable income, if they have previously included the
amount in their income or loaned out cash, and they
can show that they intended to make a loan at the time
of the transaction and not a gift. The IRS classifies non-
business bad debt as short-term capital losses.The rule
is that an expense must be recognized at the time a
transaction occurs rather than when payment is made.
For this reason, bad debt is calculated using the
allowance method, which provides an estimated dollar
amount of uncollectible accounts in the same
accounting period in which the revenue is earned.

SUBMITTED BY:

SRAVYA

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VENKATESH

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