What is a Non Performing Asset (NPA)?

Meaning and Definition:

In the Indian financial parlance, a non-performing asset is a bad loan that is not able to service either interest or principal or both for a period over 90 days.

Significance:

Indian banks, especially public or government sector (PSU) banks have accumulated huge amounts of NPAs over the past many years. The reasons for NPAs are threefold:

Borrowers deliberately not repaying bank loans;

Even good and healthy companies coming under stress on account of global events – for example the worldwide collapse in commodity prices have stressed producers of crude oil, minerals and metals;

Improper credit decisions by banks;

Remedy:

In order to prevent the collapse of the banking system, like the 2008 Lehman Brothers event, The Reserve Bank of India (RBI), especially under the previous governor Raghuram Rajan, pushed all the banks to rid their balance sheets of bad loans by making adequate provisions for losses. As a result almost all banks have been writing of bad loans in the last few quarters.

In the mean time, The Government of India has also pledged and indeed infusing fresh capital to strengthen the PSU Banks.

Is the cure permanent?

PSU banks have been recapitalized in the past but had fallen back to the old and inefficient ways in the past. It remains to be seen whether this time around the cure is permanent or one more repetitive instance.