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When a borrower fails to repay EMIs of a loan for a minimum of 3 months, then banks classify such accounts as NPA(Non-Performing Asset). In such conditions, the borrower will become a defaulter and banks try to recover the whole loan amount in a single go. But mostly at that time, the borrower was already facing a financial crunch. Also, becoming an NPA heavily impacts the credit score of a person and he/she is not able to get any money from another bank.

This condition is very stressful as the borrower is not able to get any financial support at that time from any banks.

In this blog, we are going to discuss what is an NPA Account and what are the consequences when you become an NPA.

What is an NPA Account?

NPA account refers to the classification of a loan or advance to the borrower who failed to pay principal or interest payment for a period of 90 days.

What are the Consequences when you become an NPA?

There are many consequences for both borrowers and lenders. Some of them are listed below:

Consequences For Borrower

  1. Reduced Financial Options – The Bank Stop Withdrawal power of running current accounts, and also suspends the other facilities like LC, and Bank Guarantee, which are necessary for the running of the business.
  2. Legal Actions – Banks start the legal proceedings against the borrower toward the recovery of their loan. Bank Starts to acquire and take possession of the underlined securities like factory land & buildings and borrower residential property. And if the bank successfully takes possession of the factory unit, then the borrowers’ total business activity comes to a halt.
  3. Mental Burden and Stress – To confront the bank borrower also involved in the legal proceedings, which creates mental burden and stress.

Consequences For Lender

  1. Loss of Profitability – Lenders lose their profitability as they do not get principal and interest amount. 
  2. Balance sheets affected – This hardly affects the balance sheet of the lenders by increasing the bad loans. Ultimately, it affects the credit score of lenders.

Impact on Economy

When there is an increase in NPA accounts in an economy, this leads to financial instability in the financial sector. The banking stability of a nation was affected and it reduced investors confidence.

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