Non-Performing Assets (NPA): Meaning, Classifications & Types

Banking has various tools to measure its users' stability, performance, and credibility. Any slight imbalance could harm the bank's reputation. Non-Performing Assets (NPA) are one way to assess the strength and stability of a bank's finances.

The non-performing assets definition refers to the default loan classification by banks and other financial institutions. These loans' interest and principal payments have been past due for a considerable time. In India, a loan becomes a non-performing asset after 90 days. This blog explains what is non-performing assets in detail.

What is NPA in Banking?

The NPA meaning in banking is any asset that fails to perform and cannot generate revenue for the bank. Loans are assets for banks as the interest that the borrower pays to the bank is their source of income. Any consumer who fails to pay the interest is categorised as “non-performing” by the bank as they fail to meet their obligations.

To regulate the norms in concurrence, banks take 90 days to identify an asset as a non-performing asset. This asset affects the banking system. Banks run for profit, which eventually affects the economy. Furthermore, such assets eat into the margin for banks.

How Non-Performing Assets (NPA) Work?

When a non-payment of interest arises, the borrower is forced to liquidate any assets pledged as a part of the debt agreement.

For example, assume a company borrows a loan of Rs 2,00,000 and makes a monthly payment of Rs 2,000. But due to some operational failure, the company cannot process payments, which have been due for the past 3 months. The bank will then classify this loan as a non-performing asset. Such non-payment of the loan causes a significant burden to the lenders.

The non-performing assets reduce the income for the banks or financial institutions and cause the decreases in earnings to be disrupted. They negatively impact the balance sheet.

Categories of Non-performing assets

Depending on the duration of the assets that have remained static or have not performed for more than 90 days, they are classified into various categories.

● Sub-standard asset: A non-performing asset that is overdue for less than or equal to 12 months is a Sub-standard asset.

● Doubtful assets: It is an asset that has remained NPA for more than 12 months.

● Loss Asset: An asset that remains a non-performing asset for more than 3 years is a loss asset. This occurs when a bank faces total loss as it cannot recover the asset.

NPA Provisioning

Provisioning is a method that banks employ to maintain a healthy book of accounts. Apart from technicalities, it is the primary responsibility to make adequate provisions for any drop in the value of loan assets. In a particular quarter, banks set aside a specific amount of profits for non-performing assets that may turn into losses in the future. Not only is the type of asset different, but the provisioning also varies from bank to bank.

For example, a Tier I bank's provision norms will differ from those of a Tier II bank. The inspecting officer of the RBI and statutory auditors make the assessment. They assist the bank's management in making adequate and necessary provisions by prudential guidelines.

NPA in Absolute Numbers

A higher number of NPAs indicates the dysfunctionality of loans and a decrease in the income of the banks. Therefore, calculating absolute numbers regularly can help in understanding the current situation of the bank. Two metrics determine the number of NPAs.

● GNPA: GNPA stands for Gross Non-Performing Asset. This number denotes the total value of NPA in a quarter or a financial year. It is obtained by adding all the principal amount and interest on that amount.

● NNPA: NNPA is Net Non-Performing Asset. The provision made by the bank is deducted from the GNPA. It is the exact value obtained after the bank has made provisions for it.

NPA in ratio

This ratio denotes the total percentage of the unrecoverable total advances. Amounts advanced are the total outstanding amount.

1. GNPA Ratio: It is the ratio of Gross NPA to Gross Advances
2. NNPA Ratio: It is the ratio of Net NPA to Net advances

Example of NPA

QUARTERLY RESULTS OF STATE BANK OF INDIA (in Rs. Cr.)	JUN '22	MAR '22	DEC '21	SEP '21	JUN '21
INTEREST EARNED
(a) Int. /Disc. on Adv/Bills	46,473.53	44,610.57	43,752.74	42,316.89	41,143.53
(b) Income on Investment	22,439.62	21,839.64	21,593.07	21,074.66	20,369.83
(c) Int. on balances With RBI	1,178.32	923.80	1,187.73	1,231.31	1,035.07
others	2,584.90	3,359.24	3,144.58	4,858.63	3,016.00
Other Income	2,312.20	11,880.15	8,673.42	8,207.60	11,802.74
EXPENDITURE
Interest Expended	41,480.44	39,535.39	38,990.72	38,297.59	37,926.00
Employees Cost	12,051.41	12,556.03	12,471.48	12,577.80	12,538.29
Other Expenses	8,704.16	10,805.15	8,367.70	8,734.62	7,928.06
Depreciation	--	--	--	--	--
Operating Profit before Provisions and contingencies	12,752.56	19,716.83	18,521.64	18,079.08	18,974.82
Provisions And Contingencies	4,392.38	7,237.45	6,973.97	188.75	10,051.96
Exceptional Items	--	--	--	-7,418.39	--
P/L Before Tax	8,360.18	12,479.38	11,547.67	10,471.94	8,922.86
Tax	2,292.10	3,365.85	3,115.79	2,845.37	2,418.86
P/L After Tax from Ordinary Activities	6,068.08	9,113.53	8,431.88	7,626.57	6,504.00
Prior Year Adjustments	--	--	--	--	--
Extra Ordinary Items	--	--	--	--	--
Net Profit/(Loss) For the Period	6,068.08	9,113.53	8,431.88	7,626.57	6,504.00
Equity Share Capital	892.46	892.46	892.46	892.46	892.46
Reserves Excluding Revaluation Reserves	--	--	--	--	--
Equity Dividend Rate (%)	--	--	--	--	--
ANALYTICAL RATIOS
a) % of Share by Govt.	56.92	56.92	56.92	56.92	56.92
b) Capital Adequacy Ratio - Basel -I	--	--	--	--	--
c) Capital Adequacy Ratio - Basel -II	--	--	--	--	--
EPS BEFORE EXTRA ORDINARY
Basic EPS	6.80	10.21	9.45	8.55	7.29
Diluted EPS	6.80	10.21	9.45	8.55	7.29
EPS AFTER EXTRAORDINARY
Basic EPS.	6.80	10.21	9.45	8.55	7.29
Diluted EPS.	6.80	10.21	9.45	8.55	7.29
NPA RATIOS :
i) Gross NPA	113,271.72	112,023.37	120,028.77	123,941.77	134,259.48
ii) Net NPA	28,257.92	27,965.71	34,539.68	37,118.61	43,152.52
i) % of Gross NPA	3.91	3.97	4.50	4.90	5.32
ii) % of Net NPA	1.00	1.02	1.34	1.52	1.77
Return on Assets %	0.48	0.74	0.71	0.66	0.57
PUBLIC SHAREHOLDING
No Of Shares (Crores)	--	--	--	--	--
Share Holding (%)	--	--	--	--	--
PROMOTERS AND PROMOTER GROUP SHAREHOLDING
A) PLEDGED/ENCUMBERED
- Number of shares (Crores)	--	--	--	--	--
- Per. of shares (as a % of the total sh. of prom. and promoter group)	--	--	--	--	--
- Per. of shares (as a % of the total Share Cap. of the company)	--	--	--	--	--
B) NON-ENCUMBERED
- Number of shares (Crores).	--	--	--	--	--
- Per. of shares (as a % of the total sh. of prom. and promoter group).	--	--	--	--	--
- Per. of shares (as a % of the total Share Cap. of the company).	--	--	--	--	--
yrs	202206	202203	202112	202109	202106

Impact of NPA on Operations

NPA is not favourable for any bank. Higher NPA numbers are quite alarming and raise questions about the banking system. It drastically impacts the work, and the following are some prominent ones:

● Profitability

It directly affects the bank's profits. The greater the value of NPA, the less profit the institution produces.

● Liability management

Banks have to lower deposit interest rates to maintain the NPA figure. At the same time, it increases the lending rates, directly affecting the bank’s business.

● Asset contraction

A higher NPA results in a lower rate of fund rotation.

● Capital adequacy

The greater the NPA, the greater the amount of capital induction needed, which raises capital costs.

● Public confidence

NPA undermines banks' soundness and creates fear among the public to conduct any business with the bank as its liquidity is at risk.