Non-Performing Assets (NPA)

NPA expands to non-performing assets (NPA). Reserve Bank of India defines Non Performing Assets in India as any advance or loan that is overdue for more than 90 days.

“An asset becomes non-performing when it ceases to generate income for the bank,” said RBI in a circular form 2007.

To be more attuned to international practises, RBI implemented the 90 days overdue norm for identifying NPAs has been made applicable from the year ended March 31, 2004. Depending on how long the assets have been an NPA, there are different types of non-performing assets as well.

What is an Asset and Nonperforming Assets for a Bank?

Asset means anything that is owned. For banks, a loan is an asset because the interest we pay on these loans is one of the most significant sources of income for the bank.

When customers, retail or corporates, are not able to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not earning anything for the bank. Therefore, RBI has defined NPAs as assets that stop generating income for them.

How Nonperforming Assets (NPA) Work?

Non-Performing Assets (NPAs) are loans or advances issued by banks or financial institutions that no longer bring in money for the lender since the borrower has failed to make payments on the principal and interest of the loan for at least 90 days.

A debt that has been past due and unpaid for a predetermined period is known as a non-performing asset (NPA).

When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its capacity to lend falls, and the possibility of loan defaults and write-offs rise.

To address this issue, the government and the Reserve Bank of India have introduced various policies and methods to manage and reduce the amount of non-performing assets (NPAs) in the banking sector.

Types of Non Performing Assets (NPA) 

Different types of non-performing assets depend on how long they remain in the NPA category.

a) Sub-Standard Assets

An asset is classified as a sub-standard asset if it remains as an NPA for a period less than or equal to 12 months. 

b) Doubtful Assets

An asset is classified as a doubtful asset if it remains as an NPA for more than 12 months. 

c) Loss Assets

An asset is considered a loss asset when it is “uncollectible” or has such little value that its continuance as a bankable asset is not suggested. However, some recovery value may be left in it as the asset has not been written off wholly or in parts.

NPA Provisioning

Keeping aside the technical definition, provisioning means an amount that the banks set aside from their profits or income in a particular quarter for non-performing assets, such as assets that may turn into losses in the future. It is a method by which banks provide for bad assets and maintain a healthy book of accounts.

Provisioning is done according to which category the asset belongs. The categories have been mentioned in the above section. Not only the type of asset but provisioning also depends on the type of bank. Like, Tier-I banks and Tier-II banks have different provisioning norms. 

GNPA and NNPA

Banks are required to make their NPAs numbers public and to the RBI from time to time. There are primarily two metrics that help us understand any bank's NPA situation.

NPA numbers for a bank will be mentioned in the standalone financial statements of a bank.

- GNPA: GNPA stands for gross non-performing assets. GNPA is an absolute amount. It tells you the total value of gross non-performing assets for the bank in a particular quarter or financial year, as the case may be.

- NNPA: NNPA stands for net non-performing assets. NNPA subtracts the provisions made by the bank from the gross NPA. Therefore net NPA gives you the exact value of non-performing assets after the bank has made specific provisions.

NPA Ratios

NPAs can also be expressed as a percentage of total advances. It gives us an idea of how much of the total advances are not recoverable. The calculation is pretty simple:

  • GNPA ratio is the ratio of the total GNPA of the total advances.
  • NNPA ratio uses net NPA to determine the ratio to the total advances.

Example of NPA

Let us have a look at State Bank of India’s quarterly results for two quarters for determining non performing assets examples through the results. NPA ratios are mentioned in standalone quarterly results.

Banks are supposed to publish their financial results on the exchanges every quarter of a fiscal year.

State Bank of India: Standalone Quarterly Statement

 

Dec ’20

Sept ’20

(in Rs. Cr. )

Interest Earned

 

(a) Int. /Disc. on Adv/Bills

58,865.01

52,382.94

(b) Income on Investment

24,525.36

23,669.56

(c) Int. on balances With RBI

732.26

735.91

(d) Others

2,493.41

3,071.18

Other Income

11,467.73

8,874.27

EXPENDITURE

 

Interest Expended

48,547.42

44,676.15

Employees Cost

14,756.65

12,867.35

Other Expenses

9,560.42

10,070.34

Depreciation

Operating Profit before Provisions and contingencies

25,219.28

21,120.02

Provisions And Contingencies

5,760.57

3,038.67

Exceptional Items

P/L Before Tax

19,458.71

18,081.35

Tax

5,253.37

4,816.83

P/L After Tax from Ordinary Activities

14,205.34

13,264.52

Prior Year Adjustments

Extraordinary Items

Net Profit/(Loss) For the Period

14,205.34

13,264.52

Equity Share Capital

892.46

892.46

Reserves Excluding Revaluation Reserves

Equity Dividend Rate (%)

ANALYTICAL RATIOS

 

a) % of Share by Govt.

56.92

56.92

b) Capital Adequacy Ratio – Basel -I

c) Capital Adequacy Ratio – Basel -II

EPS Before Extra Ordinary

 

Basic EPS

15.92

14.86

Diluted EPS

15.92

14.86

EPS After Extra Ordinary

 

Basic EPS

15.92

14.86

Diluted EPS

15.92

14.86

NPA Ratios :

 

i) Gross NPA

96,346.50

106,804.14

ii) Net NPA

23,484.31

23,572.19

i) % of Gross NPA

3.14

3.52

ii) % of Net NPA

0.77

0.80

Return on Assets %

1.08

1.04

Public Share Holding

 

No Of Shares (Crores)

Share Holding (%)

Promoters and Promoter Group Shareholding

 

a) Pledged/Encumbered

 

– Number of shares (Crores)

– Per. of shares (as a % of the total sh. of prom. and promoter group)

– Per. of shares (as a % of the total Share Cap. of the company)

b) Non-encumbered

 

– Number of shares (Crores)

– Per. of shares (as a % of the total sh. of prom. and promoter group)

– Per. of shares (as a % of the total Share Cap. of the company)

Notes

|202212

|202209

High NPAs may not be favourable for a bank. This is because they are assets that are not performing. High NPAs mean that banks have too many loans that have become non-functional or are not rendering any interest income to the bank.

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Banks can either keep the NPAs in their books in the hope that they may be able to recover it or make provisions for it. Or else banks write off the loans entirely as bad debt. However, there are many other factors to assess a bank apart from NPA.

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