Now stressed assets are getting increased attention as the trend of deteriorating asset quality has emerged as a big economic risk for the Indian banking sector. Stressed assets is a powerful indicator of the health of the banking system. To understand stressed assets we have to understand NPA and Restructured assets. This is because:
Stressed assets = NPAs + Restructured loans + Written off assets
Assets of the banking system comprises of loans given and investment (in bonds) made by banks. Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal. The most important scale of asset quality is Non Performing Assets (NPA). An NPA means interest or principal is not repaid by the borrower during a specified time period.
Bad assets are further classified into substandard asset, doubtful asset, and loss assets depending upon how long a loan remains as an NPA.
Measuring stressed assets
But NPA alone doesn’t tell the whole story of bad asset quality of loans given by banks. Some of the loans are restructured by banks by giving a further opportunity to the borrower if they default. This opportunity is in the form of an extended time period for repayment and a reduced interest rate or such soft conditions. Hence a new classification is made in the form of stressed assets that comprises restructured loans and written off assets besides NPAs.
Stressed assets = NPAs + Restructured loans + Written off assets
What is an NPA?
A loan whose interest and/or installment of principal have remained ‘overdue ‘ (not paid) for a period of 90 days is considered as NPA.
What is restructured loans?
Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures. Hence, under restructuring a bad loan is modified as a new loan. A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan. Whether the borrower will repay it in future remains a risky element. Corporate Debt Restructuring Mechanism (CDM) allows restructuring of loans.
What is written off assets?
Written off assets are those the bank or lender doesn’t count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are compensated through some other way. There is no meaning that the borrower is pardoned or got exempted from payment.
The ratio of stressed assets to gross advances of the Indian banking system is increasing from 2013 onwards. It has risen from around 6 per cent at the end of March 2011 to 11.1 per cent by March 2015.
Public Sector Banks have the highest stressed asset ratio 13.5 per cent of total advances as of March 2015, compared to 4.6 per cent in the case of private sector banks.
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