What are NPAs, and how can your institute recover from their damage?
NPAs can cause serious problems – here are some ideas for avoiding non-performing assets.
NPA is short for “non-performing assets.” In short, this means any asset, like a loan, that a bank or financial institution has issued to a borrower that a borrower has stopped paying on. This asset is no longer performing for the bank, because they have issued funds that they aren’t going to receive back or receive interest on. This is bad for banks in several ways:
Reduced profits: Interest is how finance groups pay themselves – they charge customers for the money they borrow. If borrowers aren’t paying their loan payments, the banks are missing that interest, as well as not receiving the return of their borrowed funds. If they don’t receive their borrowed money back, they don’t have funding to continue lending and earning interest on those loans. It’s a cascading effect of profit loss.
Reduced rating: If banks don’t have enough money to continue offering loans and other assets, their perceived quality in the banking community will suffer.
Economic issues: An abundance of NPAs, like those seen in the American banking crisis around 2008, can have an adverse impact on not just banking organizations, but the entire economy.
NPA Recovery Tools
Unfortunately, there aren’t any standard, guaranteed NPA recovery methods for recovering lost money through NPAs. Many times, customers have died or lost their jobs and are unable to pay on their loan. Other times they refuse to pay for one reason or another. Banks cannot force a customer to repay, though consequences of non-payment like fines and reduced customer credit ratings that make it hard to get credit or loans in the future are meant to deter customers from not paying their loans. There are some steps a bank can take to recover some of the funds, though.
The most common is legal settlement. Banks can take borrowers to court to try to sue for some of their money. This often looks like a structured settlement where a client can’t pay back the full amount of the loan, but they come to an agreement for some amount that assures the bank that while it isn’t receiving its full due, it hasn’t lost it all either. Sometimes, depending on the type of loan or credit, banks can get their assets back by a court issued wage garnishment, where money is automatically taken from the client’s paycheck and issued to the bank.
How to avoid NPAs
The best way to avoid the negative effects of an NPA is to mitigate risk. Lending and banking are inherently risky, but here are some ways to reduce your NPA risk.
- Fully vet credit risk of all clients
- Offer plenty of credit or loan options to suit all kinds of clients with varying credit risk
- Understand the economy and economic trends
- When issuing credit to a business, don’t just analyze the risk of the individuals or the assets of that business, but also the industry the business is in
It’s impossible to remove all risk from the finance industry, but careful planning, thorough research, and deliberate and balanced business dealings can help banks from having to go through less NPA recovery.