Non Performing Asset (NPA) is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to pay interest or principal for 90 days the loan is considered to be a non-performing asset. Non-performing assets create problem for the financial institution as these institutions depend on the interest from the public and corporate for the income generation.
Causes of NPA are as follows
- Default by the borrowers and wrong practices by bank like advancing loans to ineligible corporates, advances without security or references, etc.
- Internal reasons: Many internal reasons like inefficient management, inappropriate technology, marketing failure, etc. resulting in poor performance of the companies.
- External reasons: External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.
Declaration of NPA does not give any advantage to banks as it is proved as junk assets whereas Debt restructuring helps the banks to take its interest and principal payment back from its borrowers.
There are occasions when corporate find themselves in financial difficulties because of factors beyond their control and also due to certain internal reasons. For the revival of such corporate as well as for the safety of the money lent by the banks and financial institutions, timely support through restructuring of the loans for genuine cases is given by the Corporate Debt Restructuring Cell (CDR Cell) and it is called Corporate debt restructuring.
The restructuring of a company’s outstanding obligations, often achieved by the waiver of part of interest or concessions in payment, or converting the un-serviced portions of interests into term loans, reduction in margins, reassessment of credit facilities including working capital, restructuring the management, reduction in equity capital to make more capital available for expansion, conversion of debentures into equity to give relief on the compulsory payment of interest on the debentures. In addition to these, often, additional finance may be sought for bringing about change in the working of the corporation. This allows a company to increase its ability to meet the obligations.
So, Debt restructuring simplified the loan structure for the borrowers and it helps them to make payment to the bank. Debt restructuring reduces the profit for the banks but not nullifies it. So, it is better for the bank to restructure the debt that is in jeopardy of default.