NPA stands for Non-Performing Asset, which is a classification used by financial institutions for loans or advances that are in default or in arrears. A loan is in arrears when principal or interest payments are late or missed, while a loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet their obligations. Banks usually categorize loans as non-performing after 90 days of non-payment of interest or principal, which can occur during the term of the loan or for failure to pay principal due at maturity. NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.

NPAs place a financial burden on the lender, and a significant number of NPAs over a period of time may indicate to regulators that the financial fitness of the bank is in jeopardy. Carrying non-performing assets on the balance sheet places three distinct burdens on lenders. The nonpayment of interest or principal reduces cash flow for the lender, which can disrupt budgets and decrease earnings. Loan loss provisions, which are set aside to cover potential losses, reduce the capital available to provide subsequent loans. Once the actual losses from defaulted loans are determined, they are written off against earnings.

Lenders generally have four options to recoup some or all of the losses resulting from non-performing assets. When companies are struggling to service debt, lenders can take proactive measures to restructure the loan, such as extending the term or reducing the interest rate. If restructuring is not possible, lenders can take possession of any collateral or sell off the loan at a significant discount to a collection agency.

In summary, NPA in banking refers to loans or advances that are in default or in arrears, and they place a financial burden on the lender. Banks usually categorize loans as non-performing after 90 days of non-payment of interest or principal, and they can be classified as a substandard asset, doubtful asset, or loss asset. Lenders have options to recover their losses, including taking possession of any collateral or selling off the loan at a significant discount to a collection agency.