How Cooperative Banks in India conduct NPA recovery?

Recovery is a major role played by the bank, and in the case of non-performing assets, there are certain guidelines issued by RBI that should be complied with.

What is NPA?

A non-performing asset is an asset that formerly generated an income for the bank but has ceased to generate that at present. Various kinds of assets can be termed as NPA, which are summarized as follows -

• Term loan: The assets, whose interest or instalment is overdue for more than 90 days, are called term loans.

• Overdraft and Cash credit: If there is an account with an outstanding balance for a period exceeding the sanctioned period of drawing, then the account becomes "out of order" or the outstanding balance is less than the sanctioned limit, but no credits are adequate to cover the interest debited for 90 days continuously, then it is called overdraft or cash credit.

• Bill purchased or discounted: If a bill is not paid for a continuous period of 90 days.

• Long duration Crop Loan: When the principal or interest is not paid for a period of one crop season.

• Short duration Crop Loan: If the principal or interest is not paid for a period of two crop seasons.

What are the classifications of NPA?

The NPA is generally classified into three categories:

• Substandard Asset: An asset that continued to be a non-performing asset for a continuous period of up to 12 months.

• Doubtful Asset: An asset that continued to be NPA for more than 12 months.

• Lost Asset: An asset that has been identified as lost, but yet to be written off, is known as a lost asset.

What are the NPAs treated by the Cooperative banks?

Cooperative banks treat non-performing assets in the following ways:

• Record of Recovery- The non-performing assets are treated based on the record of recovery, but they should not treat an advance as NPA just for the reason that deficiencies, which are temporary problems, such as non-availability of enough drawing power, limit exceeding outstanding balance, a stock statement not being submitted and failure to renew the limits by the due date.

However, if there is a threat to any loss to occur, or the recoverability is doubtful, the asset can be treated as NPA.

If the accounts of the borrowers are regularized through repayment of the due amount by recognized sources, the account is not treated as NPA.

• Borrower wise Treatment of NPA - If the borrower has more than one facility with the Cooperative bank, then all the facilities that are granted by the bank shall be treated as non-performing assets.

• Agricultural Advances - In case there is a natural calamity that ruined the crops, the Cooperative bank may convert the short-term production loan into a term loan and rearrange for scheduling a new date for the repayment period, or sanction a fresh short-term loan. In such a situation, the assets shall not be treated as NPAs.

• Housing Loan to Staff - Housing loans by nature are quite similar to the advances granted to the staff members, where the interest becomes payable only after the principal is recovered. In other words, the interest does not require to be calculated as overdue from the first quarter. Only when there is a missing payment of an instalment of the principal or interest payable in respect to the due dates, then such advances can be classified as NPA.

• Credit Facilities Guaranteed by Government - The credit facilities which are supported by the Central Government cannot be treated as NPA, though there is an overdue. This is applicable only when the NPA is not for recognition of income.

• Project Financing - 'Project Loan' is classified as a term loan that has received an extension to set up an economic venture. Where the industrial projects have received the finances from the bank where the suspension is available and the payment of interest becomes due when the suspension is over. The loan becomes NPA only after the due date for payment of interest, when not collected.

The recovery of the NPA by the Cooperative bank is subject to the guidelines passed by RBI. The bank can proceed with the recovery action only if it is recommended by the Reserve Bank of India.