Non-performing Assets (NPAs) are a major concern within the banking and financial sector as they signify assets that no longer generate income for the lender. A loan is considered non-performing when the borrower fails to make interest or principal payments for 90 days or more. NPAs fall into categories such as Sub-standard Assets, Doubtful Assets, and Loss Assets. Sub-standard Assets are those classified as NPAs for up to 12 months, while Doubtful Assets remain NPAs for over 12 months. Loss Assets are identified as such by the bank or external auditors, yet the full amount has not been written off.
Key financial indicators associated with NPAs include the Gross NPA Ratio and Net NPA Ratio. The Gross NPA Ratio reveals the proportion of gross NPAs to total advances, providing insight into the overall NPA levels within the bank. On the other hand, the Net NPA Ratio shows the ratio of net NPAs (gross NPAs minus provisions) to total advances, indicating the true impact of NPAs on the bank.
The NPA ratios for the top six banks in India, as presented in the table below, will now be examined. Over the past five financial years, HDFC Bank, ICICI Bank, and Axis Banks, the three leading private sector banks, have consistently reported lower Gross and Net NPAs compared to State Bank of India, Bank of Baroda, and Punjab National Bank, the three leading public sector banks. In FY2024, HDFC Bank's Gross NPA was 1.24% and its Net NPA was 0.33%. ICICI Bank's Gross NPA was 2.16% and its Net NPA was 0.42%. Axis Bank’s Gross NPA was 1.43% and its Net NPA was 0.31%. On the other hand, State Bank of India had a Gross NPA of 2.24% and a Net NPA of 0.57%. Bank of Baroda had a Gross NPA of 2.92% and a Net NPA of 0.68%. Punjab National Bank had a Gross NPA of 5.73% and a Net NPA of 0.73% during the same period.
HDFC Bank has consistently reported the lowest non-performing assets over the past 5 financial years, with Gross NPAs ranging between 1.0-1.3% and Net NPAs between 0.27-0.40%. In FY2024, there was a slight increase in non-performing assets compared to FY2023, with Gross NPAs rising from 1.12% to 1.24% and Net NPAs from 0.27% to 0.73%. On the other hand, Punjab National Bank had the highest non-performing assets among the six major banks during the same period, with Gross NPAs ranging between 5.73-14% and Net NPAs between 0.73-5.78%. However, PNB has significantly reduced its non-performing assets, with Gross NPAs decreasing from 14% in FY2020 to 5.73% in FY2024 and Net NPAs from 5.78% to 0.73%, thanks to successful loan recovery efforts and effective measures to prevent further deterioration.
SBI, BoB, and Axis Bank have also consistently reduced their respective non-performing assets over the past 5 years. SBI's Gross NPA decreased from 6% in FY2020 to 2.24% in FY2024, while Net NPAs decreased from 2.23% in FY2020 to 0.57% in FY2024. BoB's Gross NPAs decreased from 9% in FY2020 to 2.92% in FY2024, and Net NPAs decreased from 3.13% in FY2020 to 0.68% in FY2024. Similarly, Axis Bank's Gross NPAs decreased from 5% in FY2020 to 1.43% in FY2024, and Net NPAs decreased from 1.56% in FY2020 to 0.31% in FY2024. ICICI Bank also reduced its Gross NPAs from 8% in FY2021 to 2.16% in FY2024, and Net NPAs from 2.10% to 0.42% during the same period.
Proper analysis of Non-performing loans is crucial as it impacts bank profitability. NPAs require banks to set aside provisions, reducing their capital base and hindering lending capacity. Elevated NPAs can lead to liquidity challenges, forcing banks to borrow at higher costs and increasing operational expenses. High-profile NPA incidents, such as the 2008 Financial Crisis and India's NPA Crisis, have had significant repercussions on banking systems. Factors like economic downturns, poor credit assessment, and ineffective recovery methods can contribute to assets becoming non-performing.
To address and alleviate the impact of NPAs, various regulatory frameworks have been established. Central banks and regulatory bodies worldwide enforce strict guidelines for the classification, reporting, and provisioning of NPAs. In India, the Reserve Bank of India (RBI) has implemented comprehensive norms for the recognition and provisioning of NPAs, promoting transparency and facilitating timely recovery. Managing NPAs effectively requires the implementation of multiple strategies, including early detection of potential NPAs, restructuring, and taking necessary recovery and legal actions. Credit risk management plays a crucial role in reducing the occurrence of NPAs by evaluating borrowers' creditworthiness, establishing appropriate credit limits, and continuously monitoring credit exposures. By adopting effective credit risk management practices, the risk of loan defaults and the subsequent increase in NPAs can be significantly minimized.
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Data Source
- Bank’s website
- Moneycontrol.com
Disclaimer
The content or analysis presented in the Blog is exclusively intended for educational purposes. It is important to note that this should not be considered as a suggestion for investing in stocks or as legal or medical advice. It is highly recommended to seek guidance from an expert before making any decisions.