When a loan becomes an NPA, Non-Performing Asset, the bank has the right to confiscate the property or asset purchased through the loan. They can then auction the asset to pay against the loan outstanding.
If you fail to make payment on a bank loan, it's possible all the remaining bank loans will become non-performing assets (NPAs), lowering your credit score. Let’s assume, you default on a credit card debt to a particular bank, your home loan or car loan from the same bank, which is paid on time, can become a bad loan as well.
And the customer may be paying all his other debts from the same bank on time, still, all his loans can be classified as non-performing assets. This is because Reserve Bank of India (RBI) guidelines mandate banks to classify nonperforming assets (NPAs) at the borrower level rather than on a loan-by-loan basis. To stop being labelled as a Non-Performing Asset (NPA), a customer must ensure that all of his loan repayments are made on time.
Experts believe that if the loans are issued by two different institutions, the NPA tag on other loans cannot be applied.
For example, if the home loan is from a particular bank and the credit card loan is from a different entity, the default on one loan cannot affect the other.
Conclusion
It is very important to make sure that you don’t allow your loans to reach the NPA stage. If you have any difficulty in repaying your loan, talk to your lender and see if you can go for loan restructuring or loan consolidation to allow for easier repayment.