What is a non-performing asset (NPA) in real estate?


When does a property turn into a non-performing asset? We examine

In the aftermath of the Coronavirus pandemic NPAs in real estate are predicted to rise. In November 2020, HDFC vice-chairman and CEO Keki Mistry, said that NPAs in India’s real estate would go up in the short term, before settling down. “NPA in real estate will inch up in the next one or two quarters, before stabilising in the next three to four quarters,” Mistry said. This makes us wonder about two things: What is an NPA and when does a property turn into an NPA?

 

What is NPA full form?

NPA refers to non-performing asset and is a term which is commonly used in credit facilities where there is default.

 

What is the meaning of NPA?

Non-performing asset (NPA) is a classification used by banks across the world, for loans on which the principal is past due and on which no interest payments have been made for a prolonged period. In other words, an NPA is a debt liability where the borrower has failed to make the interest and principal repayments on previously agreed upon terms for an extended period of time. Under the RBI norms in India, an NPA in banking is a loan for which the principal or interest payment has remained overdue for a period of 90 days.

See also: How to pay home loan EMIs in case of job loss due to the Coronavirus pandemic?

 

NPA non-performing asset

 

When does a property turn into a non-performing asset?

  • A housing project becomes an NPA, when the developer fails to pay the principal and interest to the bank, forcing the latter to initiate various measures to cut losses. This often ultimately ends up in the lender approaching insolvency tribunals to recover losses, something we have seen in cases of Amrapali, Jaypee and Unitech.
  • When an individual fails to pay his home loan on time, his loan also becomes a NPA. In this situation, too, the bank would ultimately sell off the property in the market to recover its losses, unless the borrower is able to pay the dues.

 

Buying a property through NPA auction? Take note

When banks sell off distressed real estate assets, it may seem like an opportunity to get a lucrative piece of property at affordable rates, as there are discounts involved. However, buyers must be acutely conscious of certain facts, before they get into a proposition such as this.

  • The bank may not be the absolute owner of the property and hence, the paperwork has to be examined carefully. For this purpose, it would be best to take the services of a lawyer and a chartered accountant.
  • Before making up your mind about the purchase, physically visit the property and check its physical condition. Do not go by how it looks on paper.
  • Look out for squatters, since the property will be sold by the bank on an ‘as-is-where-is’ basis. This means, it will be up to the buyer and not the bank, to deal with the squatters after taking control of the property.

See also: Risks in buying property through auction

 

FAQ

What is NPA as per RBI?

An NPA is defined as a loan or credit facility, where the interest and/ or principal has remained overdue for a certain period of time.

How NPA affect banks?

An increase in NPAs, adversely affects the bank’s ability to offer credit and also impacts the financial stability of the bank.

How NPA affects home buyers?

If a home buyer defaults on his loan, resulting in the same being classified as an NPA, the bank may take possession of the property and sell it, to recover the outstanding amount on the loan.

 

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