The definition of Non Performing Asset can be found in Section 2(o) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, in short SARFESI.It means an asset or account of a borrower which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset. Before proceeding to recovery procedures under SARFESI Act an account of the borrower has to be classified as a doubtful asset or Non Performing Asset(NPA). Generally an account is classified as NPA, when the active continuing of it becomes doubtful.
When the outstanding balance in the account is less than the sanctioned limit or drawing power, but there are no credits continuosly for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the said period, such accounts should be treated as NPA. The bank has the absolute power to classify an account as NPA. But care should be taken that such absolute power may not turn out to be an arbitrary one.
The Bank must always take the attempt to upgrade the account or revive the account if the borrower pays the arrears of interest along with the principal amount in his account which is already classified as NPA.
Go to this link for viewing Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances by RBI.

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