Question

What are Non-Performing Assets? Explain any three preventive measures to avoid non-performing assets.

Hint:

Remember: Strong checks before lending and quick follow-ups help banks keep NPAs low.

Answer 1

Non-Performing Assets (NPAs) are loans or advances for which the principal or interest payment has remained overdue for a period of 90 days or more.
When a borrower stops paying back the loan as agreed, it becomes non-performing, resulting in losses for the bank.
High NPAs affect a bank’s profitability and weaken the overall financial system.
Three preventive measures to avoid NPAs are:
1) Proper Credit Appraisal: Before approving a loan, banks should thoroughly check the borrower’s credit history, repayment capacity, business plan, and financial position.
Strong appraisal reduces the risk of lending to unreliable customers.
2) Regular Monitoring: After disbursing the loan, banks should monitor the borrower’s account regularly.
Early detection of delayed payments allows banks to take timely action and prevent the account from becoming an NPA.
3) Effective Recovery Mechanism: Banks should have efficient recovery and follow-up systems.
Issuing reminders, sending notices, and using legal actions when needed help recover dues and keep NPAs under control.
By following these measures, banks can maintain healthy assets and avoid the burden of non-performing loans.