What is a Non-Performing Asset (NPA)?

About Non-Performing Asset (NPA): 

• A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. They can include various types of loans, such as personal loans, business loans, mortgages and credit card debt. 
• 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.
• Types of NPAs: Different types of NPAs depend on how long they remain in the NPA category
  • Sub-Standard Assets: An asset is classified as a sub-standard asset if it remains as an NPA for a period less than or equal to 12 months. 
  • Doubtful Assets: An asset is classified as a doubtful asset if it remains as an NPA for more than 12 months.
  • Loss Assets: An asset is considered a loss asset when it is “uncollectible” or has such little value that its continuance as a bankable asset is not suggested. However, some recovery value may be left in it as the asset has not been written off wholly or in parts.
• NPA Provisioning:
  • Provisioning means an amount that the banks set aside from their profits or income in a particular quarter for non-performing assets, such as assets that may turn into losses in the future.
  • It is a method by which banks provide for bad assets and maintain a healthy book of accounts. It is done according to which category the asset belongs.
• Gross non-performing assets (GNPA) and Net non-performing assets (NNPA): Banks are required to make their NPA numbers public and to the RBI from time to time. There are primarily two metrics that help us understand any bank's NPA situation.
  • GNPA: GNPA is an absolute amount. It tells you the total value of gross non-performing assets for the bank in a particular quarter or financial year, as the case may be.
  • NNPA: NNPA subtracts the provisions made by the bank from the GNPA. Therefore, net NPA gives you the exact value of non-performing assets after the bank has made specific provisions.
• The NNPA is a measure of the actual losses that a bank has incurred on its NPAs. A high NNPA indicates that a bank has incurred large losses on its NPAs.