Non-Performing Asset (NPA) is a critical term in banking and finance, referring to loans or advances on which the borrower has stopped making interest or principal repayments for a specified period. Typically, a loan is classified as an NPA if interest or installment payments remain overdue for 90 days or more. Understanding NPAs is essential for both investors and banking professionals, as high levels of NPAs can affect a bankís profitability, liquidity, and overall financial health.

The primary cause of NPAs is borrowersí inability to repay due to financial stress, business failure, or economic downturns. Other factors include poor credit appraisal, inadequate monitoring of loans, and delays in project execution. NPAs are categorized into substandard, doubtful, and loss assets, based on the duration of default and the likelihood of recovery. Substandard assets are overdue for up to 12 months, doubtful assets have remained non-performing for 12ñ24 months, and loss assets are considered unrecoverable.

Banks are required to make provisions for NPAs as per regulatory guidelines, which means setting aside a portion of their profits to cover potential losses. This provisioning directly impacts the bankís earnings and capital adequacy. Effective management of NPAs involves regular monitoring of loan portfolios, restructuring viable loans, initiating recovery measures, and following legal procedures like the Insolvency and Bankruptcy Code (IBC) for defaulted borrowers.

For investors, monitoring NPAs in banks provides insights into the quality of assets and potential risks in the financial system. High NPAs indicate stressed assets and can affect stock performance and investor confidence. Conversely, a declining trend in NPAs suggests better asset quality and improved operational efficiency. Understanding NPAs, their causes, and their impact helps stakeholders make informed financial decisions while maintaining a stable and transparent banking environment.