Non-Performing Assets i.e. ‘NPAs’ are those assets which are not earning adequate returns to the lending institutions. These are generally the bad loans in the books of the lenders, which may occur due to failure to meet the debt obligation on time/default by the borrowers of such loans.
Generally the assets i.e. the loans provided by the lenders are classified as ‘NPAs’ when its payment obligation is not served by the borrowers for more than 90 days.
In light of the above background, now we may briefly understand the impact of NPAs as below:
i) Lenders- When assets turn NPA due to default in payment by the borrowers then it creates revenue loss for the lenders. It may put financial burden on the lenders and they may face shortage of funds for other purposes.
ii) Borrowers-The NPAs impact the borrowers as well, when the asset is non-performing and payments are not made to the lenders, it can negatively impact borrower’s credit rating and growth possibilities. It may also hamper their ability to obtain funds in future.
iii) Others- When the borrowers default then it may be an indicator of deteriorating business health, which may have a material impact on its paying capacity to its employees, vendors, etc.
Considering the past, improvement is being made so as to minimize the impact of NPAs eg, increase in DICGC insurance limits, etc.
Summary: The NPAs impact the lender’s position and may also effect the borrower’s business operations.
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