Asset Quality Ratio: How to Calculate and Interpret the Ratio of Non Performing Assets to Total Assets

The NPA ratio has also improved from 11.2% in March 2018 to 7.5% in December 2020. The trend of Non-Performing Assets (NPAs) in the Indian banking system has been a cause for concern in recent years. The Indian banking system has been struggling with high levels of NPAs for some time now, and the situation has worsened in recent years due to a combination of factors. Or group of individuals for personal use, such as buying a house, car, or funding education.

In the concept of non-performing assets ,the value of the collateral pledged needs to be assessed, and proper valuation of the property/asset should be done, keeping the loan to value ratio in mind. The borrower’s character needs to be judged, and the willingness of the company to repay debt needs to be evaluated at that time. In addition, they should also consider the management, history, revenue pipelines, stock performance, and media coverage of the company. There could be other types of NPAs, including residential mortgages, home equity loans, credit card loans, non-credit card outstandings, and direct and indirect consumer loans. A term loan, i.e., a plain vanilla debt facility, is treated as an NPA when the principal or the interest installment of the loan has been due for more than 90 days.

• A loan can also be categorized as nonperforming if a company makes all interest payments but can’t repay the principal at maturity.
• In a particular quarter, banks set aside a specific amount of profits for non-performing assets that may turn into losses in the future.
• The value of the original shares is usually eliminated when bonds are converted to new equity shares.
• When comparing NPA ratios worldwide, it’s essential to consider the diverse economic environments, regulatory frameworks, and banking practices that influence these figures.
• These industries are capital-intensive and often operate on thin margins.
• 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.
• The nonpayment of interest or principal reduces cash flow for the lender, which can disrupt budgets and decrease earnings.

Difference between Non-performing Asset (NPA) and Non-performing loan (NPL)

After a prolonged period of nonpayment, the mortgage lender may force the borrower to liquidate or sell any assets that were pledged as collateral for the loan. Before diving into the ratios, it is essential to understand what NPAs are. Non-Performing Assets refer to loans or advances that are in default or arrears. These are loans where the borrower has failed to meet interest or principal payments for a specified period, typically 90 days or more. A substandard asset is one that’s classified as an NPA for less than 12 months.

Depending on the size, scope, and nature of the bank, different industry averages and peer groups may be more relevant and representative. The Non-Performing Asset (NPA) ratio is a critical indicator of the health of a banking sector, reflecting the percentage of loans that are in jeopardy of default. This metric serves as a barometer for the financial stability and creditworthiness of banks across the globe.

What is NPA (Non-Performing Asset)?

The banks have to do this to collect the outstanding debt on the loan they issued, or else it will be an immense loss, and the asset would otherwise be irrecoverable. When companies are struggling to service debt, lenders can take proactive steps to restructure loans to maintain cash flow and avoid classifying loans as nonperforming. When defaulted loans are collateralized or secured by the borrower’s assets, lenders can repossess the collateral and sell it to cover losses, depending on the asset’s resale value. If the borrower defaults on the payment for three consecutive months, i.e., 90 days, the bank needs to classify the loan as a non-performing asset on their balance sheet for that financial year. The lending practices should be sounds and stable with proper transparency so that the far reaching negative impact of such losses can be minimised and the financial system of the economy remains strong. ICICI Bank’s Gross NPA Ratio of 3.14% indicates that approximately 3.14% of its total loan portfolio is non-performing.

Banks may attempt to collect the outstanding debt by foreclosing on whatever property or asset has been used to secure the loan. For example, if an individual takes out a second mortgage and that loan becomes an NPA, the bank will generally send notice of foreclosure on the home because it is being used as collateral for the loan. Loans, as addressed above, are not switched into the NPA category until a considerable period of non-payment has passed. Lenders consider all of the factors that may make a borrower late on making interest and principal payments and extend a grace period. In the absence of collateral, prolonged non-repayment may lead the lender to classify the loan as bad debt.

Promoter Funding Companies in India Noida

Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. In the case of companies, it is more risky, as there is no collateral, and thus for the non-performing assets management, they have to write the entire amount off as NPA. A higher number of NPAs indicates the dysfunctionality of loans and a decrease in the income of the banks.

• Both Gross NPA and Net NPA influence key metrics like ROA, ROE, and NIM.
• NPAs are a major concern for banks and financial institutions as they can impact their profitability and stability.
• In the dynamic world of venture capital, growth metrics stand as critical indicators of a startup’s…
• Shiv Nanda is a financial analyst at MoneyTap who loves to write on various financial topics online.
• This, in turn, can impact the bank’s stock performance and the investor’s portfolio.
• NPA ratios serve as a historical ledger, recording the impacts of economic policies, market dynamics, and institutional behaviors.

Impact on Banks/lending institutions

Mutual Fund, Mutual Fund-SIP are not Exchange traded products, and the npa ratio Member is just acting as distributor. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. Currently, it is envisioned that the NPA in India will further improve to around 4.9% by September of this year.

Debt Restructuring

Additionally, the stage of economic development and prevailing economic conditions, such as recession or growth, can significantly impact the NPA ratios. The long gestation period for projects, coupled with high capital costs and regulatory hurdles, can lead to payment delays or defaults. An example is the real estate slump during the financial crisis of 2008, which led to a surge in NPAs in these sectors. Non-performing assets can be manageable, but it depends on how many there are and how far they are past due. However, if the volume of NPAs continues to build over a period of time, it threatens the financial health and future success of the lender. For the bank or lender, interest earned on loans acts as a main source of income.

Banks are generally ready to take some haircut on the loan amounts, which are categorized under this asset class. A higher Net NPA ratio can negatively affect profitability, as the bank needs to make higher provisions, reducing its income. A lower Net NPA ratio, however, indicates effective risk management and healthier profitability. HDFC Bank’s Gross NPA Ratio of 1% indicates a low level of non-performing assets.