Non-Performing Assets (NPA)
In banking terms, a nonperforming asset (NPA) is a loan in which the borrower is in default due to the fact that they have not made the scheduled payments for a specified period. According to International Monetary Fund (IMF), a non-performing asset or loan is classified as one for which;
- Payments of interest and principal are past due by 90 days or more
- At least 90 days of interest payments have been capitalized, refinanced or delayed by agreement
- Payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full
In India, non-performing loans are common in the agricultural sector where the farmers can't pay back the loan or the interest amount mainly as a result of losses due to floods or drought.
In banking terms, a nonperforming asset (NPA) is a loan in which the borrower is in default due to the fact that they have not made the scheduled payments for a specified period. According to International Monetary Fund (IMF), a non-performing asset or loan is classified as one for which;
- Payments of interest and principal are past due by 90 days or more
- At least 90 days of interest payments have been capitalized, refinanced or delayed by agreement
- Payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full
In India, non-performing loans are common in the agricultural sector where the farmers can't pay back the loan or the interest amount mainly as a result of losses due to floods or drought.
SUBJECT Variables
GROSS NPA
Gross NPA is simply the total bad assets without factoring any provisions made by the banks.
- The gross NPA of all scheduled commercial banks in India dropped to ₹7,43,653 crore in 2021-22 from ₹8,35,138 crore a year ago.
- The gross NPA ratio (% of total advances) in 2021-22 was 5.8%, in comparison to 7.3% a year ago. The gross NPA ratio has fallen consecutively for 4 years since hitting a record 11.2% in 2017-18.
- After reaching a high of 6.8% in 2017-18, the gross NPAs in 2021-22 equaled 3.4% of the total assets of the scheduled commercial banks in India.
- 72.9% of the total gross NPAs of all scheduled commercial banks in 2021-22 were recognized by the public sector banks, the lowest ratio since 2011-12.
- Private banks recognized 24.3% of the total gross NPA while foreign banks recognized 1.85% of the total gross NPA in 2021-22.
NET NPA
Banks need to continuously assess their loans and set aside an amount in the beginning itself to accommodate for any losses. It means that for a total loan base of say 500 Crores, depending on the interest payments nature, banks are required to keep a provision aside, let us say 50 Crores. In simple terms, it means that the bank has already kept aside 50 Crores for bad assets and has the money to bear that loss. Net NPA is simply the total bad assets (actual) minus the provision left aside. eg.
Scenario 1: Gross NPA is 100 crore, provision is 10 crore . At the end of the year, the bank manages to collect 85 crore only. Thus Net NPA = 5 Crores (100-85-10 crore)
Scenario 2: If the bank manages to collect 95 crore. Then Net NPA = 5-10 = -5 crore.
Generic Conclusions: In an ideal and healthy scenario, the Net NPA mean of the all the banks should be close to zero. If an individual bank has Net NPA in negative, then that is a good sign. In practice you would see the Net NPA or Gross NPA as a percentage. Usually it is calculated on the total lending done for that year.
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