NPA (non-performing asset)

What it is

For a bank, a loan is an asset because it earns interest. When the borrower stops paying, the loan stops “performing”. Under long-standing RBI rules, a loan is generally classed as an NPA when interest or principal has been overdue for more than 90 days.

Banks report gross NPA, the total value of such bad loans, and net NPA, which is gross NPA minus the money the bank has already set aside to cover losses. That set-aside money is called a provision.

How to read it

Look at NPAs as a percentage of total loans, and watch the trend over several quarters. Falling gross and net NPA ratios suggest the bank is lending carefully and recovering money. Rising ratios are one of the clearest warning signs in banking.

The provision coverage ratio (provisions ÷ gross NPA) tells you how much of the bad loans are already covered. Higher coverage means fewer nasty surprises later, because the losses have already been taken against profit.

Why it matters

Banks earn thin margins on huge amounts of borrowed money. A small rise in bad loans can wipe out a large part of a year’s profit and eat into the bank’s capital.

This is why banks are judged on asset quality, not just profit growth or P/E. A bank growing loans very fast while NPAs creep up may be storing up trouble for later.

Gross vs net NPA

A bank has total loans of ₹50,000 crore. Loans worth ₹2,000 crore have not been serviced for over 90 days, so gross NPA is 4%. The bank has set aside provisions of ₹1,400 crore. Net NPA = ₹2,000 − ₹1,400 = ₹600 crore, and the provision coverage ratio is 70%.

Common mistakes

• Judging a bank only on profit growth without checking NPAs.
• Looking at net NPA alone and ignoring how large gross NPA is.
• Ignoring a steady rise in NPAs because the latest quarter looked fine.

A bank’s gross NPA is ₹800 crore and it has provisions of ₹600 crore. What is its net NPA?

1. ₹200 crore
2. ₹1,400 crore
3. ₹600 crore