Understanding NPA
The full form of NPA is Non-performing Assets. NPA refers to all those loans or advances that are overdue for more than 90 days. These loans have stopped generating income for the financial institutions or banks as the borrower fails to repay principal and interest amount within the specified time period.
Whenever the ratio of NPA of any bank increases, the profitability ratio of the bank declines. The capacity of the bank to lend assets further falls and the possibility of loan defaulter substantially rises.
Types of NPA
Depending on the duration of NPA, the assets are divided into various types, those are:
- Substandard assets: In this type of NPA, the borrower fails to repay for more than 90 days but for less than or equal to 12 months. The repayment on such assets is considered uncertain.
- Doubtful asset: Any asset that remains NPA for more than 12 months becomes a doubtful asset. The repayment over such assets is nil, leading to high risk of loss.
- Loss asset: When the value of any asset is very less and is advised to not be continued as a bankable asset, those assets are loss assets. In other words, these are assets considered irrecoverable and are written off from the bank’s balance sheet.
Impact of NPA
Following are a few points that indicates the impact any NPA causes on the banks and financial institutions:
- Financial loss: Interest is another income source for banks. If any asset turns into an NPA, their profitability declines, leading to a loss of income.
- Risk Management: If a large number of assets turns into NPA, the credit risk management framework of the banks is considered to be weak.
- Credit Crunch: The increasing amount of NPAs can reduce the bank lending capacity. This can have a bigger impact on the businesses and overall economy.
- Investor trust: A large number of NPA can impact the investors’ trust on the financial institution or banks.
- Shares: Stock prices and market perception of the bank is negatively impacted.
