An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank and is overdue for a period of 90 days.Banks are required to classify NPAs further into

Substandard, Doubtful and Loss Assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Status of NPAs in India
Banks have been asked by the RBI to clean up their account statement and their asset book by March 2017 following the huge NPAs pending with these banks.
Resultantly this led to 29 public sector banks writing off Rs1.14 Lakh Crore of bad debts between 2013 -2015, much more than what they had done in the preceding 9 years.
• The gross bad loans of 39 listed Indian banks, in absolute term, rose 92% in fiscal year 2016 to Rs.5.79 trillion even as after provisioning, the net bad loans more than doubled to Rs.3.38 trillion.
• In percentage terms, the average gross non-performing assets (NPAs) of this group of banks rose from 4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year rose from 2.45% to 4.63%.
• Public sector banks, which have close to 70% market share of loans, are more affected than their private sector peers. Two of them have over 15% gross NPAs and an additional eight close to 10% and more.

Impact of NPAs on Banks:
• Rising of NPAs will lead to a crisis of confidence in the market.
• The price of loans, i.e. the interest rates will shoot up.
• Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
• It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
• This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
• The trend may continue in a vicious circle and deepen the crisis.

Laws related to NPAs and Bankruptcy
• SARFAESI Act – It empowers Banks/Financial Institutions to recover their NPAs without the intervention of the court, through acquiring and disposing secured assets in case of outstanding amounts greater than 1 lakh. SARFAESI has been used only against the small borrowers primarily from MSME sectors.
• Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and above. DRTs are overburdened leading to slow disposal of cases.
• Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalats mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of dispute.
• Under banking regulation act 1949, RBI is empowered to monitor the asset quality of banks by inspecting record books.

BASEL NORMS: PRUDENTIAL NORMS AND CAPITAL ADEQUACY
• Implementing the Narsimham Committee recommendations, RBI prescribed that banks should make 100 per cent provision for all loss assets or non-performing assets (NPAs) over a period of 2 years, as prudential norms.
• Capital Adequacy Norms required the banks to achieve a capital to risk weighted asset ratio of 8 per cent. A bank’s real capital is assessed after taking into account the riskiness of its assets. Providing a cushion for the riskiness of the asset is necessary to guarantee against insolvency.
• The international norm for Capital Adequacy Ratio was set by Basel Committee on Banking Supervision under the aegis of the Bank of International Settlements (BIS) Basle, Switzerland, after the failure of the German Bank Herstatt in 1974.
• It is a committee of Bank Supervisors consisting of members from each of the G10 countries. The committee is a forum for discussion of the handling of specific supervisory problems.
• It came up with the first set of recommendations which are called Basel I. These included a minimum capital adequacy of 8 per cent of the total risk weighted assets of a bank.
• Many Indian Banks had to go in for public issues to satisfy capital adequacy norms. It was later realized that Basel I norms addressed only financial risk.
• Accordingly, a revised set of norms called Basel II was brought out in June 2004. These are more complex norms and are based on the three pillars of Capital Requirement, Supervisory Review and Market Discipline.
• Despite Basel II norms, the financial market crisis of 2008 revealed the need for further stringency.
• Basel III was proposed in Dec 2010 in order to improve the banking sector’s ability to absorb shocks arising from financial and economic stress.
• RBI has issued instructions for the adoption of Basel III norms from Jan 2013 in a phased manner to be completed by March 31, 2018.
• This will require fresh infusion of capital for which dilution of PSU bank capital has been decided without diluting govt. control.