Unit no 02

Credit Risk

By: Prof. Prachi Jagwani

Content:
• Objective & Scope
• CRR
• SLR
• Bank Rate
• Repo Rate
• Reverse Repo Rate
• Priority Sector Lending
• NPA management
Credit Risk-
• While financial institutions have faced • Credit risk is most simply defined as the
difficulties over the years for a multitude potential that a bank borrower or
of reasons, the major cause of serious counterparty will fail to meet its
banking problems continues to be directly obligations in accordance with agreed
related to lax credit standards for terms. The goal of credit risk
borrowers and counterparties, poor management is to maximise a bank’s risk-
portfolio risk management, or a lack of adjusted rate of return by maintaining
attention to changes in economic or other credit risk exposure within acceptable
circumstances that can lead to a parameters. Banks need to manage the
deterioration in the credit standing of a credit risk inherent in the entire portfolio
bank’s counterparties. This experience is as well as the risk in individual credits or
common in both G-10 and non-G-10 transactions. Banks should also consider
countries the relationships between credit risk and
other risks. The effective management of
credit risk is a critical component of a
comprehensive approach to risk
management and essential to the long-
term success of any banking organisation
• For most banks, loans are the largest and • Since exposure to credit risk continues to be
most obvious source of credit risk; however, the leading source of problems in banks
other sources of credit risk exist throughout world-wide, banks and their supervisors
the activities of a bank, including in the should be able to draw useful lessons from
banking book and in the trading book, and past experiences. Banks should now have a
both on and off the balance sheet. Banks are keen awareness of the need to identify,
increasingly facing credit risk (or counterparty measure, monitor and control credit risk as
risk) in various financial instruments other well as to determine that they hold adequate
than loans, including acceptances, interbank capital against these risks and that they are
transactions, trade financing, foreign adequately compensated for risks incurred.
exchange transactions, financial futures, The Basel Committee is issuing this document
swaps, bonds, equities, options, and in the in order to encourage banking supervisors
extension of commitments and guarantees, globally to promote sound practices for
and the settlement of transactions. managing credit risk. Although the principles
contained in this paper are most clearly
applicable to the business of lending, they
should be applied to all activities where credit
risk is present.
 Principles for the Assessment of Banks’
Management of Credit Risk
Establishing an appropriate credit risk environment
• 1: The board of directors should have • Principle 3: Banks should identify and manage
responsibility for approving and periodically (at credit risk inherent in all products and
least annually) reviewing the credit risk strategy activities. Banks should ensure that the risks of
and significant credit risk policies of the bank. The products and activities new to them are
strategy should reflect the bank’s tolerance for risk subject to adequate risk management
and the level of profitability the bank expects to procedures and controls before being
achieve for incurring various credit risks. introduced or undertaken, and approved in
• Principle 2: Senior management should have advance by the board of directors or its
responsibility for implementing the credit risk appropriate committee.
strategy approved by the board of directors and
for developing policies and procedures for
identifying, measuring, monitoring and controlling
credit risk. Such policies and procedures should
address credit risk in all of the bank’s activities and
at both the individual credit and portfolio levels.
Operating under a sound credit granting
process
• Principle 4: Banks must operate within sound, • Principle 6: Banks should have a clearly-
well-defined credit-granting criteria. These established process in place for approving
criteria should include a clear indication of new credits as well as the amendment,
the bank’s target market and a thorough renewal and re-financing of existing credits.
understanding of the borrower or
counterparty, as well as the purpose and
structure of the credit, and its source of
repayment.
• Principle 5: Banks should establish overall
credit limits at the level of individual
borrowers and counterparties, and groups of
connected counterparties that aggregate in a
comparable and meaningful manner different
types of exposures, both in the banking and
trading book and on and off the balance
sheet.
 C. Maintaining an appropriate credit
administration, measurement and monitoring
process
• Principle 8: Banks should have in place a • Principle 10: Banks are encouraged to
system for the ongoing administration of develop and utilise an internal risk
their various credit risk-bearing portfolios. rating system in managing credit risk.
The rating system should be
• Principle 9: Banks must have in place a consistent with the nature, size and
system for monitoring the condition of complexity of a bank’s activities.
individual credits, including determining • Principle 11: Banks must have
the adequacy of provisions and reserves. information systems and analytical
techniques that enable management
to measure the credit risk inherent in
all on- and off-balance sheet activities.
The management information system
should provide adequate information
on the composition of the credit
portfolio, including identification of
any concentrations of risk.
Objectives of credit risk management
• Minimize Default Risk: One of the primary objectives of
credit risk management is to minimize the risk of default by
borrowers. This involves thorough evaluation of potential
borrowers' creditworthiness before extending credit.
• Optimize Risk-Return Tradeoff: Credit risk management aims
to strike a balance between risk and return. It involves
identifying and assessing risks associated with different credit
exposures and making decisions that optimize returns while
keeping risks within acceptable levels.
• Ensure Adequate Capital Adequacy: Effective credit risk
management ensures that financial institutions maintain
adequate capital reserves to absorb potential losses arising
from credit defaults. This involves assessing capital
requirements based on the level of credit risk exposure.
• Maintain Liquidity: Credit risk management also aims to
maintain liquidity by ensuring that the institution has
sufficient funds to meet its obligations even in the event of
unexpected credit losses.
• Compliance with Regulations: Financial institutions must
comply with regulatory requirements related to credit risk
management. These regulations are designed to safeguard
the stability of the financial system and protect the interests
of depositors and investors.
Objectives of credit risk management:
• Enhance Profitability: While managing credit risk involves mitigating
potential losses, it also presents opportunities for generating profits.
Effective credit risk management involves identifying and capitalizing
on profitable lending opportunities while managing associated risks.
• Improve Decision Making: Credit risk management involves
implementing robust credit assessment processes and decision-
making frameworks. This ensures that lending decisions are based on
accurate and timely information, thereby reducing the likelihood of
defaults.
• Monitor and Control Risk Exposure: Continuous monitoring of credit
exposures is essential for identifying emerging risks and taking
proactive measures to mitigate them. Credit risk management involves
implementing controls and risk mitigation strategies to limit exposure
to potential credit losses.
• Enhance Reputational Risk Management: Defaults and credit-related
issues can damage the reputation of financial institutions. Effective
credit risk management involves safeguarding the institution's
reputation by ensuring responsible lending practices and addressing
any concerns promptly and transparently.
• Improve Portfolio Performance: Credit risk management aims to
optimize the performance of the lending portfolio by diversifying
credit exposures, managing concentration risks, and continuously
evaluating and adjusting credit risk strategies based on market
conditions and performance metrics.
CRR:
• The Cash Reserve Ratio (CRR) is a • Key objectives of the Cash Reserve Ratio
monetary policy tool used by central
banks to regulate the money supply and
control inflation. Here's how CRR works: • Following are the critical objectives of the
CRR is the percentage of a bank's net Cash Reserve Ratio.
demand and time liabilities (NDTL) that • CRR helps control inflation. In a high inflation
it is required to maintain as cash environment, RBI can increase CRR to prevent
reserves with the central bank. banks from lending more.
• CRR also ensures banks have a minimum
amount of funds readily available to
customers even during huge demand.
• CRR serves as the reference rate for loans.
Also known as the base rate for loans, the
banks cannot offer loans below this rate.
• Since CRR regulates the money supply, it
boosts the economy whenever required by
lowering the Cash Reserve Ratio.
CRR:
• How does CRR control inflation? • Why does CRR keep changing?

• The Cash Reserve Ratio directly impacts the level of • The RBI keeps changing the cash reserve ratio for
liquidity in the country's economy. You can assume it consumers' safety and a smooth economy. It ensures
is a money supply valve RBI holds to control that the banks have adequate funds to meet customers'
inflation. In case of higher inflation, the RBI can requirements even during high withdrawals. Moreover,
increase the Cash Reserve Ratio requirements to RBI can also increase or decrease the CRR to meet its
reduce the banks' lending capacity, thereby lowering other requirements, such as supplying money to boost
inflation. the economy.
• How is CRR calculated? • Knowing how CRR works for banks and financial
institutions can help you make informed decisions and
choose when to go for a suitable financial product. The
• The Cash Reserve Ratio is calculated based on the Cash Reserve Ratio is a safety net for the customers and
bank's net demand and time liabilities (NDTL). Net is an integral part of RBI's monetary policies.
demand and time liability can be defined as the total
deposits of the bank with the public or other banks
minus the deposits of other banks. Liabilities such as
current deposits, cash certificates, demand drafts, • “The Cash Reserve Ratio (CRR) ensures consumers'
fixed deposits (FDs), gold deposits, dividends etc., financial security. It forces banks to maintain adequate
constitute NDTL. Here is a simple expression to liquidity.”
calculate the cash reserve ratio:
• CRR = (Liquid Cash/NDTL) * 100
 CRR • When the CRR rate is reduced by RBI,
commercial banks can offer more
• Advantages Of CRR advances to borrowers which in turn
increases the flow of cash to the public.
• CRR helps in spreading money circulation in
the economy to manage the overall liquidity. • CRR helps in improving the declining
CRR rate is fixed as per the money supply in rate by absorbing the liquidity when
the financial market. When there is an increase market interest rates go down intensely.
in monetary supply, the RBI instantly increases
the CRR to remove the excess funds. Similarly, • Cash reserve ratio implementation is
during the case of a liquidity shortage or a more effective than the other monetary
decrease in the monetary supply in the instruments Like Market Stabilization
economy, RBI will decrease the CRR rate to let Scheme bonds. Mainly because MSS
out more money into the market. Let’s take a bonds take a lot of time in controlling
look at other advantages of the Cash reserve the liquidity system in the country.
ratio. • During the surplus rupee situation, CRR
• CRR helps commercial banks to build and plays a constructive role in easing the
sustain the solvency position. financial environment.
• It ensures the liquidity system is consistent and
maintained well in all commercial banks.
• RBI gets to control and coordinate the credit
maintained by banks through the CRR rate
which helps to have a smooth supply of cash
and credit in the economy.
CRR:
• Importance Of Cash Reserve Ratio • Maximum lending by banks helps
them achieve high profits.
• Cash Reserve Ratio maintained by banks However, banks do have enough
holds importance for both Banks as well funds to meet a sudden demand
as the depositors. for withdrawals when they use a
• In the case of depositors, when the banks major portion of their money for
sincerely maintain the required CRR rate, lending purposes.
depositors don’t have to worry for their • This is where CRR comes into the
deposits as a portion of their money is picture. The Cash Reserve ratio
safe in the form of reserve maintained rate is fixed by RBI to avoid such
with RBI. situations where the bank cannot
• The importance of CRR for banks is as meet repayments due to a
mentioned below: shortage of funds.
• Banks allow customers to open deposits
mainly for lending. Banks like to lend a
maximum amount of funds to borrowers
and retain very little money with
themselves for other purposes. Therefore,
banks like it when the CRR rate is low.
CRR
• First of all, the chief goal of CRR is to • If any depositor has invested in bank
ensure that a small portion of funds is stocks, then increased CRR rate indicates
always available against the deposits. that their bank will have lower margins.
Second, is to enable the RBI control rates
and overall liquidity in the nation. • Similarly, when the CRR rate is low, banks
have more money to invest in other
• Now, banks prefer CRR when it is low businesses this reduces the interest rates
because they need to maintain the charged on loans.
specified ratio of funds with RBI without
earning any interest on the reserved fund • Also, a low cash reserve ratio means the
that means the money is kept for free. money supply of the banking system will
increase. Increased money supply means
• The increased CRR rate means that high inflation.
banks have a low lending capacity in
terms of funds. Consequently, banks
would like to open more deposit
accounts. Also, Banks will increase the
interest rate which will discourage
borrowers from applying for loans
because high-interest rates indicate
higher loan expenses.
SLR:
• Statutory Liquidity Ratio -Definition
• Statutory Liquidity Ratio or SLR is the
minimum percentage of deposits that a
commercial bank has to maintain in the
form of liquid cash, gold or other
securities. It is basically the reserve
requirement that banks are expected to
keep before offering credit to customers.
The SLR is fixed by the RBI and is a form of
control over the credit growth in India.
• The government uses the SLR to regulate
inflation and fuel growth. Increasing the
SLR will control inflation in the economy
while decreasing the statutory liquidity
rate will cause growth in the economy.
The SLR was prescribed by Section 24
(2A) of Banking Regulation Act, 1949.
• Why is the SLR fixed? • SLR plays a very important role in fixing
the minimum rate at which a bank can
• To check the expansion of bank credit. lend money to its customers. This
• To ensure the solvency of commercial minimum amount is called the base rate.
banks. This helps in building transparency
between the Reserve Bank of India and
• To compel banks to invest in government other public dealing banks.
securities like bonds.
• The Reserve Bank of India is the body
• To fuel growth and demand; this is done which sets the SLR. The Reserve Bank of
by decreasing the SLR so that there is India increases the SLR at the time of
more liquidity with the commercial banks. inflation to control bank credit. At the time
of recession, RBI decreases the SLR to
• If a bank fails to maintain the prescribed increase bank credit.
SLR, it is liable to pay a penalty to the
Reserve Bank of India. The defaulter bank
has to pay a penalty of 3% above the
bank rate on the deficient amount for
that particular day.
SLR:
• Objectives of SLR • 4) Making banks invest a portion of their
• While the main objective of monetary deposits in government securities also
policy tools like CRR and SLR is to ensures the solvency of such banks.
maintain liquidity, there are multiple • 5) SLR might be a monetary policy tool,
objectives that these tools serve as well. but it has also helped the government sell
• 1) One of the main objectives is to a lot of its securities. So SLR helps in the
prevent commercial banks from government’s debt management program
liquidating their liquid assets when the and RBI’s monetary policy as well.
RBI raises the CRR.
• 2) SLR is used by the RBI to control credit
flow in the banks.
• 3) In a way, SLR rate also makes
commercial banks invest in government
securities.
SLR:
SLR:
• Uses of Statutory Liquidity Ratio • In many ways, SLR also helps RBI
(SLR) control inflation. Raising SLR makes
• As the chief monetary authority of banks park more money in
our economy, RBI is responsible for government securities and reduce
handling cash the level of cash in the economy.
flows, inflation levels, and price This helps raise price levels and
levels in the country. inflation in the economy. Doing the
opposite helps maintain cash flow
• To carry out its functions efficiently, in the economy. Reducing SLR
RBI has many tools at its disposal. leaves more liquidity with banks,
These include; Repo rate, reverse which in turn can fuel growth and
repo rate, marginal standing demand in the economy.
facility, bank rate, open market • This is how changing the SLR ratio
operations, moral suasion, CRR, also helps RBI maintain bank credit
SLR, and a few others. flow.
Bank Rate
• The bank rate is the rate of
interest which is charged by
a central bank while lending
loans to a commercial bank.
In the event of a fund
deficiency, a bank can
borrow money from the
central bank of a country. In
India’s case that would be
the Reserve Bank of India.
The borrowing is done as
per the basis of
the monetary policy of that
country.
Bank Rate
• How is a Bank Rate determined? • What is the Bank Rate in India?
• The interest rate is charged by a • As mentioned before, the Reserve
nation’s central financial authority Bank of India determines the bank
that controls the money supply in the rate. The rate is changed from time
economy as well as the banking to time but it does not mean that
sector. This is usually done quarterly there is already a set schedule for it.
to stabilize inflation and control the The rate at which the repo rates are
country’s exchange rates. changed depends entirely on the
• When a bank rate changes it triggers prevailing economy.
a domino effect that influences every • As of March 2021, the Bank Rate is
sphere of a country’s economy. For 4.25% the Repo Rate is 4.00%, and the
example prices in the stock market Reverse Repo Rate is 3.35%
change due to fluctuations in interest
rate changes. A change in bank rate
affects customers as it affects the
rates at which they can take loans
Repo rate
• Repo rate refers to the rate at
which commercial banks borrow
money by selling their securities
to the Central Bank of our
country i.e. Reserve Bank of
India (RBI) to maintain liquidity,
in case of shortage of funds or
due to some statutory measures.
It is one of the main tools of RBI
to keep inflation under control.
 Repo Rate:
• Objectives of Repo rate: • Manage Aggregate Demand: The repo rate can be used
to manage aggregate demand in the economy. By
• Inflation Control: One of the primary objectives of influencing borrowing costs, the central bank can
adjusting the repo rate is to control inflation. By raising the encourage or discourage spending and investment,
repo rate, the central bank aims to reduce the money thereby influencing overall demand for goods and
supply in the economy, which can help to curb inflationary services. This can help to smooth out fluctuations in
pressures by making borrowing more expensive. economic activity and prevent overheating or recession.
Conversely, lowering the repo rate can stimulate economic
activity and spending, potentially leading to higher • Exchange Rate Management: In some cases, central
inflation. banks may use changes in the repo rate to influence the
exchange rate. By adjusting interest rates relative to those
• Stimulate Economic Growth: Another objective of setting in other countries, central banks can affect capital flows
the repo rate is to stimulate economic growth. When the and the value of the domestic currency. This can have
central bank lowers the repo rate, borrowing becomes implications for trade competitiveness and the balance of
cheaper for businesses and consumers. This can encourage payments.
investment, consumption, and lending, leading to
increased economic activity and growth. • Financial Stability: Maintaining financial stability is
another objective of setting the repo rate. By influencing
• Maintain Price Stability: Central banks typically aim to credit conditions and the cost of borrowing, the central
maintain price stability as a key objective of monetary bank can help to prevent excessive risk-taking and
policy. By adjusting the repo rate, the central bank can speculative bubbles in financial markets. This can
influence aggregate demand in the economy, which in turn contribute to a more stable and resilient financial system.
affects price levels. Stable prices are important for
maintaining the purchasing power of money and fostering
economic stability.
 Repo rate
• How Does Repo Rate Work? • How Does Repo Rate Affect the Economy?
• When you borrow money from the bank, the transaction • Repo rate is a powerful arm of the Indian monetary policy that can
attracts interest on the principal amount. This is referred to regulate the country’s money supply, inflation levels, and liquidity.
Additionally, the levels of repo have a direct impact on the cost of
as the cost of credit. Similarly, banks also borrow money borrowing for banks. Higher the repo rate, higher will be the cost of
from RBI during a cash crunch on which they are required borrowing for banks and vice-versa.
to pay interest to the Central Bank. This interest rate is • Rise in inflation
called the repo rate.
• During high levels of inflation, RBI makes strong attempts to bring down
• Technically, repo stands for ‘Repurchasing Option’ or the flow of money in the economy. One way to do this is by increasing
‘Repurchase Agreement’. It is an agreement in which banks the repo rate. This makes borrowing a costly affair for businesses and
provide eligible securities such as Treasury Bills to the RBI industries, which in turn slows down investment and money supply in
while availing overnight loans. An agreement to repurchase the market. As a result, it negatively impacts the growth of the
them at a predetermined price will also be in place. Thus, economy, which helps in controlling inflation.
the bank gets the cash and the central bank the security. • Increasing Liquidity in the Market
• On the other hand, when the RBI needs to pump funds into the system,
it lowers the repo rate. Consequently, businesses and industries find it
cheaper to borrow money for different investment purposes. It also
increases the overall supply of money in the economy. This ultimately
boosts the growth rate of the economy.
 Reverse Repo Rate
• What is Meant by Reverse Repo Rate?
• Reverse Repo Rate is a mechanism to absorb
the liquidity in the market, thus restricting
the borrowing power of investors.
• Reverse Repo Rate is when the RBI borrows
money from banks when there is excess
liquidity in the market. The banks benefit out
of it by receiving interest for their holdings
with the central bank.
• During high levels of inflation in the economy,
the RBI increases the reverse repo. It
encourages the banks to park more funds
with the RBI to earn higher returns on excess
funds. Banks are left with lesser funds to
extend loans and borrowings to consumers.
Reverse Repo Rate
• Impact of Reverse Repo Rate on Economy • Reverse Repo Rate and RBI
• The reverse repo rate has an impact on the • Reverse repo rate is the rate of interest at which the
economy as when the reverse repo rate is Reserve Bank of India or RBI borrows money from
increased banks deposit their surplus funds with commercial banks for a short period. This helps the
RBI in order to gain interest. RBI have a ready source of liquidity in case of any
situation. The Reserve Bank of India offers the
• The result is that the economy experiences commercial banks great interest rates in return for
reduced money flow, the banks find it more the amount borrowed by it.
feasible to deposit the money in the central bank
rather than providing it to individuals or • Additionally, the commercial banks keep the extra or
businesses which results in boosting the value of additional funds from the Reserve Bank of India as it
the rupee. is considered a security. The benefit that the
commercial banks get from this is that they will gain
• Similarly, inflation is controlled by RBI by high-interest levels from the central bank. It's an
increasing the reverse repo rate, and when the opportunity for commercial banks to earn interest on
situations are perfect for increasing the inflation, idle money.
RBI then cuts the reverse repo rate and repo rate
so as to inject liquidity into the economy. • When there is inflation in the economy, the RBI
increases the reverse repo rate. This move of the RBI
• The impact of change in reverse repo rate can be encourages the banks to have more of their funds
seen in home loans, as an increased reverse repo with the RBI. It's something that will ensure that the
rate will encourage banks to invest their surplus banks can earn high returns on the excess funds.
funds in low-risk government securities instead of Commercial banks are left with lesser funds which
providing credit to individuals. extend loans and borrowings to the customers.
Difference between repo rate & reverse repo
rate:
 Priority Sector Lending (PSL)

• The Reserve Bank of India decides to

allot funds to predetermined priority
sectors of the economy that may
require credit and financial assistance,
especially in cases where the lack of
PSL will lead to the heavy losses to the
participants of that sector in some
cases.
• Priority Sectors Lending is the role
exercised by the RBI to banks,
imploring them to dedicate funds for
specific sectors of the economy like
agriculture and allied activities,
education and housing and food for
the poorer population.
Priority Sector Lending:
• Priority Sector Lending in Banking
• Different Categories of the Priority Sector • The Reserve Bank of India assigns the task of Priority Sector Lending to the
smaller banks by helping the low-income groups and weaker sections to
• The eight different broad categories under grow and prosper. This will prove beneficial for the overall development of
priority sector lending would include the the economy rather than just concentrating on the financial sector. The RBI is
following: the governing authority that releases different classifications and guidelines
with the sole intention of making a match between the rising national
priorities and comprehensive development by bringing all the stakeholders
• Agriculture together.
• Micro, Small, and Medium Enterprises • Under the Priority Sector Lending scheme, the already decided sectors of the
(MSMEs) economy are allotted funds for their further growth by the RBI with an
overview that they are on the lookout for credit and financial assistance. If
they are not provided with funds at the correct time, they would incur heavy
• Export Credit losses and the very thought of availing of a credit boost seems a little difficult
for such sectors.
• Education • New Guidelines for Priority Sector Lending
• Housing • Reserve Bank of India has revised the PSL categories and credit limit. As per
the Priority Sector Lending, the new guidelines are:
• Social Infrastructure
• Bank finance to start-ups up to Rs. 50 crore
• Renewable Energy • Loans for the installation of compressed biogas plants
• Others • Loans for farmers for setting up solar power plants.
• The limit has increased to 10 crores for Health infrastructure,
• The renewable energy limit has increased to 30 crores
• Banks can give up to 5 crores of loans for building schools, sanitation, and
drinking water facilities.
Priority Sector Lending:
• PSL Features • Significance of Priority Sector Lending
• With the availability of funds from the bank at a lower
• This initiative by the government interest rate, the number of industries grew specifically
believed in providing credit to the and related activities at the ground level saw major
changes.
weaker sections of society and not • This helped the living standards of the rural people and
just to the priority sectors that are further improved them to a greater extent by putting an
end to poverty.
already in a profitable situation
adding to the economic growth of • With all this in hand, infrastructure saw many
developmental changes, and the rural areas got
the country. transformed making them the desirable place for the
economy and its funding capacity.
• With this implementation, all such • Agriculture and allied goods saw major growth in
sectors get the right to ask for production levels as the small and marginal farmers got
the increased lending that made it quite simpler for
financial assistance in the form of them, which was not possible otherwise.
bank loans at a much cheaper rate. • All this was a major boost for the economy as a whole
with the right support to gross domestic product making
the country flourish and get the profits shared amongst
all the sectors in an equal proportion.
'Non Performing Assets
• • What is an Asset and Nonperforming Assets for a Bank?
Definition: A non performing asset (NPA) is a • Asset means anything that is owned. For banks, a loan is an asset
loan or advance for which the principal or because the interest we pay on these loans is one of the most
interest payment remained overdue for a period significant sources of income for the bank.
of 90 days. • When customers, retail or corporates, are not able to pay the interest,
the asset becomes ‘non-performing’ for the bank because it is not
Description: Banks are required to classify earning anything for the bank. Therefore, RBI has defined NPAs as
NPAs further into Substandard, Doubtful and assets that stop generating income for them.
Loss assets. • How Nonperforming Assets (NPA) Work?
1. Substandard assets: Assets which has • Non-Performing Assets (NPAs) are loans or advances issued by banks
remained NPA for a period less than or equal to or financial institutions that no longer bring in money for the lender
12 months. since the borrower has failed to make payments on the principal and
interest of the loan for at least 90 days.
2. Doubtful assets: An asset would be classified • A debt that has been past due and unpaid for a predetermined period
as doubtful if it has remained in the is known as a non-performing asset (NPA).
substandard category for a period of 12 months. • When the ratio of NPAs in a bank's loan portfolio rises, its income and
profitability fall, its capacity to lend falls, and the possibility of loan
3. Loss assets: As per RBI, “Loss asset is defaults and write-offs rise.
considered uncollectible and of such little value
that its continuance as a bankable asset is not • To address this issue, the government and the Reserve Bank of India
have introduced various policies and methods to manage and reduce
warranted, although there may be some the amount of non-performing assets (NPAs) in the banking sector
salvage or recovery value.”