Loss asset
Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT
Meaning
A loss asset is a bad loan that the bank, its auditors or RBI inspection has identified as uncollectible. It has not yet been written off, meaning it has not yet been removed from the bank's balance sheet. It is the last and worst step in RBI's classification ladder: standard → sub-standard → doubtful → loss. There is little or no hope of recovery, so the bank must provide 100% of the amount.
Example
During an inspection, RBI finds that a borrower's factory has shut down. The machinery pledged as security turns out to be almost worthless. RBI tags the Rs 5 crore loan as a loss asset, and the bank must set aside the full Rs 5 crore.
Don't confuse with
- Doubtful asset: defined by time (sub-standard for 12 months) and still seen as partly recoverable. A loss asset is defined by being judged uncollectible, whatever its age.
- Written-off loan: removed from the balance sheet, though the borrower still owes the money. A loss asset is still on the books.
Related concepts
- Standard asset
- Special Mention Account
- Non-Performing Asset
- Sub-standard asset
- Doubtful asset
- Gross and net NPA
- Loan loss provisioning
- Provisioning Coverage Ratio
- Stressed assets
- Expected Credit Loss provisioning