Why NPA Matters A Lot In Banks? A Complete Guide

By | April 12, 2022

Nowadays NPA (Non-Performing Assets) has become such a word which is being discussed a lot. Almost everyone talks about it in banks. But many people do not know much about NPA. On hearing the name of NPA, it comes to mind that NPA is related to loan. But how it is related to loan is not known and why NPA matters a lot in banks. Let’s see!

Why NPA Matters A Lot In Banks

Topics Discussed in This Article:

  • Meaning of NPA
  • Types of NPA
  • Why NPA Matters A Lot in Banks
  • When Does Account Become NPA
  • Disadvantages of NPA

If you also do not have information about NPA, then you will get complete information related to NPA in this article and you will finally know why NPA matters a lot in banks. You have to read this article till the last. After this you will get answers to all the questions related to NPA.

Meaning Of NPA (Non-Performing Assets)

The full form of NPA is Non Performing Asset. It is simply a loan or advance given by bank to its customers which has overdue principal or interest payment for a period of 90 days. When a person who has taken a loan from the bank is unable to pay EMI, then his loan account is called NPA.

In simple words, we can also say that the loan given by the bank to a person has sunk and has no hope of meeting again, then we can call it NPA. NPA has always been a topic of important discussion in the banking sector. And due to NPA, the banks have to face a lot of problems.

Types Of NPA (Non-Performing Assets)

Often people think of NPA as one type. But let us tell you that NPA accounts are not the same. NPA does not mean that the bank’s money has sunk Or the bank has stopped collecting that loan. The truth is this That after declaring a loan account as NPA, the bank has to categorize the NPA account into 3 parts:

  • Substandard Assets
  • Doubtful Assets
  • Loss Assets

Substandard Assets

Whenever a loan account remains in NPA for one year or less, then it is called as Substandard Assets.

Doubtful Assets

When a loan account remains in the category of Substandard Assets Account for one year, then it is called doubtful assets.

Loss Assets

If there is no expectation of recovery of the loan, then it is treated as a loss asset.

Why NPA Matters A Lot in Banks

NPA is a key measure of the quality of the bank’s loan book. It is calculated by taking all the loans that are non-performing, meaning they have not been paid in full for at least 90 days, and dividing it by total loans.

NPA matters a lot to banks because it reflects the quality of their loan book. Banks should be worried when their NPA ratio goes up because this means that more loans are not being paid back in time and are becoming past due.

Here are four reasons why it is important for banks to keep their NPA low:

1) The Central Bank of the country sets NPAs target at certain percent, this will help banks maintain their profitability and stay in the market.

2) A high NPAs ratio can lead to higher interest rates on loans and also lead to a lower credit rating.

3) It can also lead to higher provisioning costs and lower capital adequacy ratios, which will eventually result in a lower ROA ratio for banks.

4) Banks with high NPAs have less funds available for lending, which means that they will be less competitive than others.

When Does Account Become NPA?

Whenever a person takes a loan from the bank then he has to deposit the money back in the bank in installments. Meanwhile, if that person does not give the money of 3 consecutive installments to the bank then his account becomes NPA.

  • Accounts become NPA when they have been inactive for a certain period of time, usually three months. This means that the account has not made any sales during this period.
  • In order to make sure that your account does not become NPA, you should make sure that you are regularly checking in on the status of your customers and taking care of their needs.

A notice is also sent by the bank to the person’s house. If that person is not able to return the money to the bank even after getting the notice then the bank takes the mortgage document in lieu of that loan. The property given on its basis is forfeited. Because no financial institution gives loan without any mortgage.

Disadvantages of NPA

NPA is a good idea, but it does have some disadvantages. Here are 5 disadvantages of NPA:

1) It doesn’t work for all people

2) It doesn’t always match the needs of the person

3) It can be expensive to use

4) It’s not an exact science and can be inaccurate

5) There are no set standards for what it should and shouldn’t do.

How to Prevent Account From Going NPA

It is important to not only check the account balance but also to monitor the account’s cash flow. This will help you identify any problems that may have arisen and prevent them from turning into a major issue.

It is also important to make sure that your billing cycle does not extend beyond 60 days. This will help in managing your cash flow and allow you to pay off any debts before they become overdue.

A company must take action if the account becomes delinquent. They can do this by notifying the customer of the delinquency, sending them a past due notice, and then reporting them to credit agencies.

The best way to prevent an account from going NPA is to make sure that the customer pays on time every month and stays within their credit limit.

So, this is all about NPA. It is the most famous term used in banks because NPA matters a lot in banking sector. So, if you have fount this article useful then do not forget to share it with your friends. And, if you have any suggestion or question then please post a comment below. Thank You!

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