Introduction
Banks provide loans to the individuals or companies to grow their business and meet their needs. There is a substantial risk associated with the banks the the borrower may not be able to return the money back to the bank with interest.
Thus, in order to protect the interest of the banks, these financial institutes take a collateral in the form of assets from the borrowers. The idea of the collateral is that, in the case of unforeseen situations, when the borrower is unable to pay back the money, the banks hold a right to sell the assets and recover the money.
Despite the banks holding the assets, it still has a considerable risk that it may still not be able recover the amount in full.
Two such conditions can be when the assets become stressed or NPA (Non performing assets)
What are NPAs (Non Performing Assets)
Non performing assets are such assets in the banks where the borrower is unable to pay the monthly installment to re-pay the loan.
Consider for example, an individual who has borrowed Rs. 1 crore from the bank against a real estate property whose value is about 1 crore. Now as per the terms of the bank, the borrower has to recover the money within 10 years at 12% interest per annum. Thus, the approx. monthly installment comes to Rs. 2.6 lakhs.
Till the time the borrower is paying its monthly installments in a timely manner, the bank holds no issues with the asset. In this case the asset is making money for the bank.
Now consider for example, after a duration of 3 years, the borrower is unable to pay the monthly installment. In this case the cash flow of the bank will get disturbed. This is an ideal case where the asset hold by the bank becomes a non performing asset.
What are stressed assets
Stressed assets are such assets held by the banks and financial institutes that fail to liquidate in order to recover the money offered to the borrower.
Mathematically, stressed assets can be defined as:
Stressed assets = (Non-performing assets) + (written-off assets) + (restructured loans)
When assets fail to perform, they are classified as questionable and non-performing. If the assets do not recover, they are classified as bad loans. They are known as Stressed Assets before the term of 90 days of non repayment of monthly installments.
Understanding this with the above example – When the borrower is unable to re-pay the loan, the banks hold the right to sell the real estate property and recover the money. There can be a scenario, where the banks are finding it difficult to find a buyer for the asset.
In this case, the bank is unable to liquidate the asset and recover the money. Thus, making it a stressed asset for the bank.
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Key difference between Stressed Assets And NPAs
Type of asset
Non performing assets (NPA) disrupts the cash flow of the banks and financial institutes as the borrowed resumes the payment of monthly installments.
On the other hand, stressed assets are such that, it cannot be liquidated easily to recover the money from the borrower.
Nature of risk
Non performing assets are less risky as the borrower still has the option to continue the repayment of the monthly installments by paying a small fee as a penalty.
The borrower may also have the flexibility to transfer the loan from one bank to another. This is done to seize attractive interest rates offered by other banks. Thus, making the NPAs back to money making assets.
While, the risk for stressed assets is substantially high for the banks in the case of stressed assets. It becomes the duty of the bank to timely liquidate the asset and recover the money from the borrower. Any delay in liquidating the assets is a loss of the banks as the interest on the assets is also bared by the bank.
When can NPAs be termed as a stressed assets
NPAs turn into stressed assets in the case when the banks are unable to sell the assets of the borrower and recover the money.
Some reasons for the assets to be stressed is:
- Non availability of right buyers to buy at a market price
- Recession in the economy, or
- The assets holding a lower intrinsic value.
Thus, a thorough valuation is carried out of the asset to find the right value. To reduce the risk of the banks in case of non re-payment, the banks throw a haircut of 20-25% on the value of the asset.
This means that if the valuation of the asset is Rs. 1 crore, the banks will only lend 75% of the money, i.e., Rs. 75 lakhs.
Conclusion
Non-performing assets (NPAs) are loans on which the bank has not received payments even 90 days beyond the due date.
Some of these NPAs are eventually restructured. They are no longer categorized as NPAs after restructuring and making new arrangements with the borrower.
Stressed assets comprise both gross non-performing assets (GNPAs) and restructured loans.
It is believed that Indian banks currently have GNPAs of INR 6.5 lakh crore and stressed assets worth INR 14 lakh crore (As of 2021).
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