Nonperforming Assets: Understanding, Impact, and Resolution Strategies

A nonperforming asset (NPA) refers to loans or advances in default or arrears. When principal or interest payments are late or missed, they’re considered arrears. If the lender deems the loan agreement broken and the debtor is unable to meet its obligations, it’s in default.

NPAs appear on a bank’s balance sheet after a prolonged period of non-payment. Lenders might force borrowers to liquidate pledged assets or write off bad debts and sell them at a discount.

Aside from term loans, other NPAs include overdrafts, cash credit accounts, agricultural advances, and overdue payments on various accounts.

Banks classify NPAs into substandard, doubtful, and loss assets based on the duration of non-performance.

Lenders have options to recover losses from NPAs, including restructuring loans, acquiring collateral, converting loans into equity, or selling bad debts at discounts.