Narendra Sharma, Consultant (Legal)

Clause (o) of sub-section (1) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has defined a non performing asset as follows:

“non-performing asset” means an asset or account of a borrower, which has bee classified by a bank or financial institution as sub-standard, doubtful or loss asset, – ……………… .

It is evident from the aforesaid definition that any asset of a borrower has been knowingly (i.e. deliberately or with an express purpose in mind) incorporated by the legislature in the definition of “non-performing asset” and therefore, the term NPA can not be restricted to mean only an account of a borrower under all situation.

Definition of Asset

Some definitions of the term “asset” are given below for ready reference and consideration:

(i) Encarta Dictionary (the online dictionary, North America) has defined the term asset to mean “somebody or something that is useful and contributes to the success of something.”

(ii) Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board {30, Cannon Street, London EC4M 6XH, England, website:, hereinafter referred to as ‘IASB’}. The following is a quotation from the IFRS Framework: “An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.”

Essential Characteristics of AN Asset – Future Economic Benefits

Future economic benefits are featured in the IASB definition of an asset. The IASB Framework (short for ‘IASB Framework for the Preparation and Presentation of Financial Statements’) explains that, “The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the entity.” Similarly, CON 6 (short for ‘The FASB Concepts Statement No. 6, Elements of Financial Statements’) states that one of the three essential characteristics of an asset is that “……….it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows.”

Future economic benefits also are featured in the Australian, Canadian, New Zealand, and UK definitions. The German definition refers to “resources” in the definition of an asset, but explains that a resource is an “inflow of future economic benefits”. The Japanese definition does not refer directly to economic benefits — rather, it refers to economic resources, but does, in the background discussion, discuss resources in terms of benefits.

A working definition of asset from above discussion may be as follows “An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity.”


Therefore, every Project is an asset, i.e. an existing economic resource with the ability to generate economic benefits to the Company. Consequently, prior to allowing the asset to reach the stage of performing asset (‘PA’), it can not be classified as Non Performing Asset (‘NPA’) by any stretch of imagination. However, in recent past, some lending banks and financial institutions have classified a Project as Non Performing Asset (‘NPA’) even prior to allowing the asset to reach the stage of performing asset (‘PA’) which is against the law.

Note: the views expressed are my personal and a view point only.


Narendra Sharma, Consultant (Legal)

E-mail: [email protected]

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June 2021