Understanding Loan Terms: Delinquency, Default, and NPA
نظرة سريعة
- This article clarifies the distinctions between loan delinquency, default, and Non-Performing Assets (NPA) as defined by the Reserve Bank of India.
- Delinquency occurs with a single missed payment, while default signifies prolonged non-payment (over 90 days).
- NPAs are loans that cease to generate income for the lender, categorized further into sub-standard, doubtful, and loss assets based on the duration of non-payment.
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لماذا يهم
When a loan is taken, borrowers are expected to repay EMIs on schedule. Missing payments can negatively impact borrowing records and credit scores. The classification of a loan as delinquent, default, or NPA depends on the duration of missed repayments.
If you are confused by personal finance terms, jargon and calculations, here’s a series to simplify and deconstruct these for you. In the 104th part of this series, Riju Mehta explains the difference between the terms used for unpaid loans.
When you take a loan from a financial institution, you are expected to repay the amount as per the scheduled equated monthly instalments (EMIs) in the specified duration. If you miss the instalments, it can impact your borrowing record and credit score. Depending on the duration for which you miss repayments, a loan is classified as delinquent or a default, and as per the lender’s classification, it’s called a nonperforming asset (NPA).
Delinquency
If you fail to pay even a single loan instalment by due date or make a late payment, the loan will be termed delinquent. The lender sends out reminders to the borrower and the status can usually be rectified by making the missed payment along with the applicable penalty or late fee. The lender contacts the credit bureaus if the delinquency continues and it can affect the borrower’s credit rating slightly. Delinquency can be considered a red flag for future loan applications.
Delinquency vs default
Default
If the borrower continues to miss multiple loan instalments over an extended period of time, usually more than 90 days, the delinquent status is changed to a default. This is a more serious situation and is not as easily rectified as a delinquent loan through payment of late fees. The rating also suffers more, with bigger cuts in credit score, and can impact future borrowings.
Non-performing asset(NPA)
This is a banking classification, and as per the Reserve Bank of India (RBI), a loan is considered a non-performing asset by the lending institution when it ceases to generate income for it. A loan is regarded as an NPA if the interest and/or principal remain overdue for more than 90 days. NPAs are classified into three categories depending on the duration for which the loan remains unpaid and the possibility of recovering it.
Sub-standard asset: When a loan remains unpaid for less than 12 months, it’s considered a sub-standard asset. Though the risk remains, so does the likelihood of recovery with suitable action.
Doubtful asset: These are loans that remain unpaid for more than 12 months and pose a high risk to the lender since the chances of recovery remain very low.
Loss asset: These loans have negligible scope of being recovered by the lender and are typically written off.
أسئلة مفتوحة
- What are the specific penalties for delinquency?
- What are the exact consequences for credit scores for each category?
- What are the typical recovery processes for doubtful and loss assets?
