When bank classify your loan account as Non-Performing Asset (NPA)?
When a Bank Classifies Your Loan Account as a Non-Performing Asset (NPA)
A Non-Performing Asset (NPA) is a loan account where the borrower fails to make scheduled payments for a specific period, typically 90 days for secured loans and 180 days for unsecured loans. This classification impacts your credit score, hinders future borrowing opportunities, and triggers certain actions from the bank.
Here are the key situations when a bank may classify your loan account as an NPA:
- Overdue Interest and Principal: When you miss payments for 90 days (or as defined in your loan agreement), the accrued interest and principal become overdue. This leads to the account being categorized as a ‘Substandard Asset’ and eventually an NPA if the default persists.
- Technical NPA: In some cases, even with sufficient funds in your account, a technical glitch or procedural error might delay automatic deduction of payment, leading to a temporary default and NPA classification. These can usually be rectified quickly by contacting the bank.
- Out-of-Order Account: For overdraft or cash credit accounts, inactivity or non-availability of funds for over 90 days can also trigger NPA classification.
- Restructured Loan Defaults: If a previously restructured loan falls into default again, the bank can reclassify it as an NPA faster than the standard timeframe.
Consequences of NPA Classification:
- Higher Interest Rates: Banks may levy higher penalty interest rates on NPAs, increasing your debt burden.
- Impact on Credit Score: Your credit score takes a significant hit when an account is flagged as an NPA, making it difficult to secure future loans or credit cards.
- Recovery Measures: The bank may initiate stricter measures, such as issuing demand notices, calling collateral if applicable, or taking legal action through the Debts Recovery Tribunal (DRT) to recover the outstanding amount.
Preventing NPA Classification:
- Maintain Regular Payments: Prioritize timely payments to avoid falling into arrears and subsequent NPA classification.
- Communicate with Bank: If facing temporary financial difficulties, proactively communicate with the bank to explore restructuring options or temporary payment adjustments.
- Clear Technical Errors: Address any technical issues or discrepancies that might lead to accidental defaults.
- NPA classification is not the end of the road. There are options to work with the bank, restructure your loan, or seek financial assistance to avoid legal action.
- Timely communication, proactive debt management, and seeking professional advice if needed can help navigate an NPA situation and prevent further complications.
If you have any concerns about your loan account or suspect an NPA classification, it’s crucial to contact your bank immediately and understand the specific reasons and potential consequences. In conclusion, a loan account is classified as an NPA when the borrower fails to meet the payment obligations within the stipulated time frame, primarily guided by the 90-day norm. This classification is crucial for banks to manage risks, make provisions, and take necessary steps for recovery.
Adcocate J.S. Rohilla (Civil & Criminal Lawyer in Indore)
Contact: 88271 22304