Banks have to classify their assets as performing and non-performing in accordance with SBP's guidelines. Under these guidelines, an asset is classified as non-performing if any amount of interest or principal installments remains overdue for more than 90 days, in respect of term loans. In respect of overdraft or cash credit, an asset is classified as non-performing if the account remains out of order for a period of 90 days and in respect of bills purchased and discounted account, if the bill remains overdue for a period of more than 90 days.
All assets do not perform uniformly. In some cases, assets perform very well and the recovery of principal and interest happen on time, while in other cases, there may be delays in recovery or no recovery at all because of one reason or the other. Similarly, an asset may exhibit good quality performance at one point of time and poor performance at some other point of time. According to the SBP guidelines, banks must classify their assets on an on-going basis into the following four categories:
Standard assets:
Standard assets service their interest and principal installments on time; although they occasionally default up to a period of 90 days. Standard assets are also called performing assets. They yield regular interest to the banks and return the due principal on time and thereby help the banks earn profit and recycle the repaid part of the loans for further lending. The other three categories (sub-standard assets, doubtful assets and loss assets) are NPLs and are discussed below.
Sub-standard assets:
where Mark-up/Interest or Principal is overdue by 90 days or more from due date .
Doubtful assets:
where Mark-up/Interest or Principal is overdue by 180 days or more from due date .
Loss assets:
where Mark-up/Interest or Principal is overdue by one year or more from due date .
