Open In App

Net Non-Performing Assets Ratio (NNPA)

Improve
Improve
Like Article
Like
Save
Share
Report

Every industry, individual, government, or bank earns profit differently. Like an industry manufactures a finished product from the raw material sells it and earns a profit. But the banks don’t produce any material, they earn profits from the interest paid by the borrowers on the loan. Thus the loan amount and interest paid by the borrowers on that loan act as an asset for the banks. The banks provide every borrower with a payback period on or before which the borrower has to pay back the principal amount along with the interests to the bank. But, when the borrower is unable to pay back the principal amount and interest then it becomes a Non-Performing Asset (NPA) for the Bank.

The net NPA ratio of Indian banks was around 2.3% in the financial year 2021-22.

What is Net Non-Performing Asset (NPA)?

As per the RBI’s circular 2007 “When a loan advance stops generating income the bank then it is called a Non-Performing Asset (NPA)”. If a loan provided by a bank is overdue for more than 90 days from the borrower’s end, it comes under NPA. While on the other hand if the loan amount is unpaid for more than 1 year from the due date then it is called a doubtful debt, and if it’s unpaid for more than 3 years then loss of an asset or default account. These circumstances can arise when the borrower intentionally tries not to repay the loan or has gone into huge debt. Under such circumstances, banks try to get the amount back the selling some of the provisions of the borrowers but if they still don’t manage to recover the whole amount then that loan is booked under NPA and written off from the bank’s statement.

Net Non-Performing Asset = Gross NPA – Provisions

Where provision means the assets of the borrower which are kept by the banks as security in advance so that, the bank can sell these assets in case of bad loans or NPA.

Gross NPA = Total Gross NPA/Total Loans given

What is Net Non-Performing Asset Ratio?

The Net NPA ratio simply means the present NPAs of the bank over the number of loans provided. Mathematically it can be understood as:

Net NPA Ratio = Net NPA/Total Loans Given

The provisions increase with the increases in the Net NPA Ratio.

How does NPA work?

When a bank lends a loan of a certain amount to a company, and the company fails to pay its interest for consecutive three months then the bank categorizes such loans under NPA and lists it as a bad debt on its balance sheet. However, the bank tries to liquidate the fund by selling the assets of the borrower kept as collateral security at discounted prices. But still, if any amount is lefts then that account turns into NPA. For example, if a company borrows a sum of INR 10 crores from a bank and fails to pay the monthly interest of INR 10 lacs for 3 consecutive months then the banks categorize such accounts under NPA. Also if the company pays the whole interest amount but fails to pay the principal amount at the end then that case also comes under NPA.

What are the different types of NPA?

  • Cash credit and overdrafts that have remained unpaid for more than 90 days.
  • Any expected payment which is overdue for more than 90 days.
  • Agricultural loans, whose interest and the principal amount are overdue.
  • The term loans also fall under NPA.

Impact of Net NPA ratio on Banks:

The increase in the NNPA ratio badly impacts the banks’ performance and operational capabilities. Due to accounts turning into NPAs the banks get short of funds and thus interest rates on loans increases. Also, a higher NNPA ratio badly affects the overall public image of the bank, and the bank losses the public trust. The increase in the net NPA ratio results in huge revenue losses for a bank, and in some extreme circumstances, RBI also gets involved and can take strict actions against the bank. 

Impact of Net NPA ratio on the Economy:

The increase in the net NPA ratio creates a bad impact on the economy as the bank gets short of funds. This increases the rate of interest on loans which directly affects the development and growth of the nation. Also, an increase in the number of NPAs results in a loss of public trust in the banks. As the bad debt in a bank increases due to an increase in NPAs, the cash flow in the market gets badly affected thus retarding infrastructural development. In extreme circumstances, the increases in NPA lead to an increase in unemployment.

 


Last Updated : 21 Jul, 2022
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads