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# What is NPA? Formula and Types

NPA, which stands for Non-Performing Asset, is a term commonly used in the banking sector to describe a loan or advance where the borrower has failed to make interest or principal payments for a specified period of time.

In simple words, an NPA is a loan that is not generating any income or revenue for the lender because the borrower has defaulted on the loan repayment. This article will provide a detailed understanding of NPA, its formula, and the types of NPA.

## What is NPA?

An NPA is a type of loan that is not generating any revenue for the lender because the borrower has failed to make interest or principal payments for a specified period of time. The Reserve Bank of India (RBI) defines an NPA as a loan or advance where:

a) Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. b) The account remains ‘out of order’ in respect of an overdraft/cash credit (OD/CC). c) The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. d) Interest and/or installment of principal remain overdue for two crop seasons for short duration crops. e) Interest and/or installment of principal remain overdue for one crop season for long duration crops.

These criteria were introduced by the RBI to classify a loan as an NPA for the purpose of regulatory reporting and provisioning. Once a loan is classified as an NPA, the bank needs to make provisions against the outstanding loan amount.

## Formula for calculating NPA

The formula for calculating NPA is straightforward. It is the ratio of the total amount of NPA to the total amount of advances made by the bank. The formula is expressed as follows:

NPA Ratio = (Total Amount of NPA / Total Advances Made) x 100

For example, if a bank has given out loans and advances worth Rs. 100 crore, and the total NPA on those loans is Rs. 10 crore, then the NPA ratio of the bank will be:

NPA Ratio = (10 / 100) x 100 = 10%

The NPA ratio is an important metric that indicates the health of a bank’s loan portfolio. A high NPA ratio indicates that the bank has a large number of non-performing loans, which can lead to a decline in profitability and impact the bank’s ability to lend further.

## Types of NPA

There are primarily two types of NPA, which are based on the classification of the borrower:

1. Corporate NPA
2. Retail NPA

### Corporate NPA

A Corporate NPA is a loan that is extended to a corporate entity or a group of companies. These loans are typically large and are given to fund long-term projects or working capital requirements. The classification of Corporate NPA is based on the financial health of the company and its ability to generate cash flows to service the debt.

There are further sub-categories of Corporate NPA, which are based on the severity of the default:

a) Sub-standard Assets: These are assets where the borrower has defaulted on the repayment for a period of more than 90 days but less than 12 months. These assets require a higher level of provisioning from the bank.

b) Doubtful Assets: These are assets where the borrower has defaulted on the repayment for a period of more than 12 months. These assets require a higher level of provisioning from the bank.

c) Loss Assets: These are assets where the bank has identified a loss but has not yet written off the outstanding amount. These assets are typically beyond recovery and require a complete write-off.

### Retail NPA

A Retail NPA is a loan that is extended to an individual

or group of individuals for personal use, such as buying a house, car, or funding education. These loans are typically smaller in size compared to Corporate NPAs and are based on the creditworthiness of the individual borrower.

There are further sub-categories of Retail NPA, which are based on the severity of the default:

a) Sub-standard Assets: These are assets where the borrower has defaulted on the repayment for a period of more than 90 days but less than 12 months. These assets require a higher level of provisioning from the bank.

b) Doubtful Assets: These are assets where the borrower has defaulted on the repayment for a period of more than 12 months. These assets require a higher level of provisioning from the bank.

c) Loss Assets: These are assets where the bank has identified a loss but has not yet written off the outstanding amount. These assets are typically beyond recovery and require a complete write-off.

## NPA trend in Indian Banking System

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.

## NPAs in Indian Banking System – Causes

There are several reasons why the level of NPAs has been rising in the Indian banking system:

1. Economic Slowdown: The Indian economy has been going through a prolonged slowdown, which has impacted the ability of borrowers to repay their loans. This has resulted in a higher number of defaults on loans, leading to an increase in NPAs.
2. Infrastructure Projects: The Indian banking system has been lending heavily to infrastructure projects, which are prone to delays and cost overruns. These delays have impacted the cash flows of these projects, leading to defaults on loans and an increase in NPAs.
3. Public Sector Banks: The Public Sector Banks (PSBs) in India have been the biggest contributors to the NPA problem. These banks have been burdened with bad loans, which have impacted their ability to lend further and eroded their profitability.
4. Corporate Governance: The lack of proper corporate governance in some companies has also contributed to the rise in NPAs. Many companies have siphoned off funds or diverted them to other projects, leading to defaults on loans.
5. Regulatory Framework: The regulatory framework in India has been weak, which has allowed some borrowers to take advantage of the system. The lack of proper monitoring and enforcement has contributed to the rise in NPAs.

## NPAs in Indian Banking System – Government’s Response

The Indian government has taken several measures to address the problem of NPAs in the banking system. Some of the measures include:

1. Recapitalization: The government has infused capital into the PSBs to help them deal with the problem of bad loans. This has helped the banks to improve their capital adequacy and strengthen their balance sheets.
2. Asset Quality Review: The Reserve Bank of India (RBI) conducted an Asset Quality Review (AQR) to identify the extent of NPAs in the banking system. The AQR helped to identify the true extent of the problem and enabled the banks to take corrective action.
3. Insolvency and Bankruptcy Code (IBC): The IBC was introduced to provide a legal framework for the resolution of distressed assets. The IBC has helped to speed up the resolution process and has made it easier for banks to recover their dues.
4. Reforms: The government has introduced several reforms to improve the governance and management of PSBs. These reforms include the appointment of professional managers, greater autonomy for the banks, and the setting up of a Banks Board Bureau.

## NPAs in Indian Banking System – Current Status

The level of NPAs in the Indian banking system has been declining in recent years. The gross NPAs of PSBs have decreased from Rs. 8.96 lakh crore in March 2018 to Rs. 6.16 lakh crore in December 2020. The NPA ratio has also improved from 11.2% in March 2018 to 7.5% in December 2020.

The decline in NPAs can be attributed to several factors, including the measures taken by the government, the improved economic outlook, and the recovery in some sectors. However, the problem of NPAs is far from over, and the banking system still faces challenges.

The trend of NPAs in the Indian banking system has been a cause for concern in recent years. The problem of bad loans has impacted the profitability of banks, eroded their capital, and affected their ability to lend further.

Year-wise NPA trend in Indian Banking System:

As you can see from the table, the level of NPAs in the Indian banking system has been rising steadily over the years, with a sharp increase in 2016 and 2017. However, the trend has started to reverse in recent years, with a decline in the NPA ratio in 2019 and 2020.

This can be attributed to the measures taken by the government and the RBI to address the problem of bad loans, as well as the improved economic outlook in the country. Nonetheless, the NPA problem still persists and remains a cause for concern in the banking system.

## NPA full form in different Indian Languages

Note: The translations provided above are not exact and may vary depending on the context in which the term is used.

## Top 10 NPA accounts in India

The information regarding the top 10 Non-Performing Assets (NPAs) in India may vary depending on the source and the time period under consideration. However, based on the latest available information, here are some of the largest NPAs in the Indian banking system:

Note: The above data is based on the latest available information as of September 2021 and may be subject to change. Additionally, these figures are not official and may vary depending on the source of information.

## Gross NPA vs Net NPA

When discussing Non-Performing Assets (NPAs) in the Indian banking system, two common terms that are often used are Gross NPA and Net NPA. While both of these terms relate to the same basic concept of non-performing loans, there are some key differences between them.

Gross NPA refers to the total amount of loans and advances that are classified as non-performing assets, without taking into account any provisions or write-offs made by the bank. In other words, it is the total amount of loans on which the borrower has defaulted, but which the bank has not yet fully written off. Gross NPA is a useful indicator of the overall quality of a bank’s loan portfolio and is widely used by investors and analysts to evaluate the financial health of a bank.

On the other hand, Net NPA takes into account the provisions and write-offs made by the bank against its non-performing assets. It is calculated by subtracting the provisions made by the bank from the gross NPA. Net NPA gives a more accurate picture of the actual losses that a bank is likely to incur on its non-performing loans.

For instance, if a bank has a gross NPA of Rs. 100 crore and has made provisions worth Rs. 20 crore against those loans, then the net NPA would be Rs. 80 crore (i.e., gross NPA of Rs. 100 crore minus provisions of Rs. 20 crore).

In general, a bank’s net NPA is considered to be a better indicator of its financial health than its gross NPA. This is because net NPA takes into account the actual losses that the bank is likely to incur on its non-performing loans, which can impact its profitability and capital adequacy ratios. A higher net NPA indicates that the bank is likely to incur higher losses on its non-performing loans, which could impact its financial stability and creditworthiness.

Note: The above data is based on the latest available information as of September 2021 and may be subject to change. Additionally, these figures are not official and may vary depending on the source of information.

## NPA provisioning norms

Provisioning norms for Non-Performing Assets (NPAs) are guidelines issued by the Reserve Bank of India (RBI) to ensure that banks maintain adequate provisions to cover potential losses on their non-performing loans. These norms are aimed at ensuring the financial stability of banks and protecting the interests of depositors and other stakeholders.

The provisioning norms for NPAs are categorized based on the age and classification of the non-performing loans. The RBI has issued detailed guidelines on provisioning norms for various types of NPAs, which are as follows:

1. Standard Assets: Loans that are performing satisfactorily and have not shown any signs of weakness are classified as standard assets. No specific provisions are required to be made for standard assets.
2. Sub-Standard Assets: Loans that are overdue for a period of 90 days or more are classified as sub-standard assets. Banks are required to make a provision of 15% of the outstanding balance on sub-standard assets.
3. Doubtful Assets: Loans that have remained in the sub-standard category for a period of 12 months are classified as doubtful assets. Banks are required to make provisions ranging from 25% to 100% of the outstanding balance on doubtful assets, depending on the age of the asset and the likelihood of recovery.
4. Loss Assets: Loans that are considered irrecoverable are classified as loss assets. Banks are required to make 100% provision for loss assets.

In addition to the above provisions, the RBI has also introduced a provision coverage ratio (PCR) requirement for banks. The PCR is the ratio of provisions made by the bank to the gross NPA. As per RBI guidelines, banks are required to maintain a minimum PCR of 70% for their non-performing assets.

It is important to note that the above provisioning norms are subject to change based on the RBI’s discretion and the prevailing economic conditions. Banks are required to adhere to these norms and maintain adequate provisions to cover potential losses on their non-performing loans. Failure to comply with these norms can result in penalties and other regulatory action by the RBI.

## Impact of NPA on Economy

The impact of Non-Performing Assets (NPAs) on the economy can be significant and far-reaching. Here are some of the major impacts of NPAs on the economy:

1. Reduced credit flow: When banks have high levels of NPAs, they become more cautious in lending, which can reduce the credit flow to the economy. This can have a negative impact on economic growth, particularly for sectors that rely heavily on bank credit.
2. Reduced investment: High levels of NPAs can also discourage investors from investing in the economy. This is because investors may perceive that the banking system is not functioning efficiently and may be hesitant to invest their capital in such an environment.
3. Increased cost of credit: When banks have high levels of NPAs, they may need to increase their lending rates to compensate for potential losses. This can increase the cost of credit for borrowers, making it more difficult for them to access funding.
4. Pressure on fiscal resources: In some cases, the government may need to step in to help banks deal with high levels of NPAs. This can put pressure on fiscal resources and reduce the government’s ability to invest in other areas of the economy.
5. Reduced confidence in the banking system: High levels of NPAs can erode public confidence in the banking system, leading to a decrease in deposits and a potential run on banks. This can create a crisis of confidence in the banking system, which can have significant negative impacts on the economy.

Overall, high levels of NPAs can have a detrimental impact on the economy by reducing credit flow, discouraging investment, increasing the cost of credit, putting pressure on fiscal resources, and eroding public confidence in the banking system. As such, it is important for banks to manage their NPAs effectively and for the government and regulatory authorities to provide a supportive policy environment to address the issue of NPAs in a timely and effective manner.

## FAQs on NPA

What is NPA?

NPA stands for Non-Performing Asset. It refers to a loan or advance that has stopped generating income for the lender (typically a bank) due to the borrower failing to make scheduled payments for a specified period.

How is NPA calculated?

NPA is calculated as the sum of all overdue payments on a loan or advance. In India, the RBI guidelines define an asset as an NPA if the borrower has not paid interest or principal for 90 days or more.

What are the types of NPAs?

The types of NPAs are based on the classification of the non-performing loans. They include standard assets, sub-standard assets, doubtful assets, and loss assets.

What is the impact of NPAs on banks?

NPAs can have a significant impact on banks’ profitability and financial stability. High levels of NPAs can lead to a reduction in credit flow, increased cost of credit, and pressure on banks’ capital adequacy ratios.

What is the impact of NPAs on the economy?

High levels of NPAs can have a detrimental impact on the economy by reducing credit flow, discouraging investment, increasing the cost of credit, putting pressure on fiscal resources, and eroding public confidence in the banking system.

How do banks manage NPAs?

Banks can manage NPAs by implementing effective credit monitoring and recovery systems, restructuring loans, selling bad loans to asset reconstruction companies, and taking legal action against defaulters.

What are the regulatory measures to address NPAs?

The Reserve Bank of India has issued various guidelines and measures to address the issue of NPAs, including provisioning norms, loan restructuring schemes, and asset quality reviews.

What is the difference between gross NPA and net NPA?

Gross NPA is the total amount of non-performing assets on a bank’s balance sheet, while net NPA is the amount of gross NPA after deducting provisions made by the bank to cover potential losses. Net NPA gives a more accurate picture of a bank’s actual bad debt situation.

Can NPAs be recovered?

Yes, NPAs can be recovered through various means such as loan restructuring, selling bad loans to asset reconstruction companies, and legal action against defaulters. However, the recovery process can be time-consuming and may require a significant investment of resources.

How can borrowers avoid becoming an NPA?

Borrowers can avoid becoming an NPA by making timely payments on their loans, maintaining a good credit score, and communicating with their lenders in case of financial difficulties.

## Conclusion

Non-Performing Assets (NPAs) are a major concern for the banking system and the economy as a whole. NPAs can impact the profitability, financial stability, and credit flow of banks, while also discouraging investment, increasing the cost of credit, and eroding public confidence in the banking system. However, effective management of NPAs can help banks minimize losses and recover bad loans through various measures.

The Reserve Bank of India has also issued guidelines and measures to address the issue of NPAs, such as provisioning norms and loan restructuring schemes. It is important for banks to implement effective credit monitoring and recovery systems and for borrowers to maintain a good credit score and communicate with their lenders in case of financial difficulties.

Overall, managing NPAs effectively is crucial for the smooth functioning of the banking system and the growth of the economy.

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Vishal Jhaverihttps://www.wealthpedia.in
Vishal Jhaveri is an experienced finance blogger with expertise in financial markets such as Stocks, Mutual Funds, Insurance, and Personal Finance. He stresses the importance of acquiring financial knowledge, a subject not typically taught in schools, to create genuine wealth and ensure a stable life for oneself and one's family. It is vital to note that all content on his website is solely for educational and informational purposes and should not be interpreted as trade or investment advice.
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