Understanding Non-Performing Assets (NPA)              

Introduction

• Non-Performing Assets (NPAs) are a significant concern in the banking sector, impacting the financial health and stability of banks. In India, the Gross Non-Performing Assets (GNPA) are anticipated to witness an improvement, potentially decreasing to 2.1 per cent by the culmination of the fiscal year 2025.

Overview of NPAs

• NPAs refer to loans or advances where the principal or interest payments have remained overdue for a period exceeding 90 days. They encompass various loan categories such as personal loans, business loans, mortgages, and credit card debt. The escalation of NPAs in a bank’s loan portfolio leads to a decline in income and profitability, diminishes its lending capacity, and elevates the risk of loan defaults and write-offs.

Types of NPAs

• NPAs are categorized based on the duration they remain in the NPA category:
• Sub-Standard Assets: Assets classified as sub-standard remain as NPAs for up to 12 months.
• Doubtful Assets: Assets categorized as doubtful remain as NPAs for more than 12 months.
• Loss Assets: Assets labeled as loss assets are deemed “uncollectible” or possessing minimal value, suggesting their discontinuation as bankable assets. However, some residual recovery value may still be present.

NPA Provisioning

• Provisioning involves setting aside a portion of profits or income by banks in each quarter for non-performing assets. This practice ensures that banks maintain a healthy balance sheet. The amount of provisioning is determined based on the classification of the asset.

Gross vs. Net NPAs

• Banks are mandated to disclose their NPA figures to the Reserve Bank of India (RBI) periodically. Two primary metrics gauge a bank’s NPA situation:
• GNPA (Gross Non-Performing Assets): GNPA represents the total value of gross non-performing assets for the bank in a specific period.
• NNPA (Net Non-Performing Assets): NNPA is derived by subtracting the provisions made by the bank from the GNPA. Hence, NNPA provides the actual value of non-performing assets after accounting for specific provisions.

Conclusion

• NPAs pose a significant challenge to the banking sector, impacting financial stability and profitability. Effective management of NPAs through proper provisioning and strategic measures is essential for maintaining the resilience of banks and ensuring a healthy lending environment.