When a loan or advance surpasses a 90-day overdue period, lending institutions categorize it as a non-performing asset (NPA). These assets no longer generate any level of income for the lender. However, it poses a substantial threat to the stability and profitability of financial institutions. Moreover, there is a potential for these assets to translate into future losses.
A surge in NPAs can adversely impact the lending capacity, overall financial well-being, and the income of the institution. Consequently, financial institutions aim to minimize NPAs. To assess the level of risk, two vital metrics are determined: Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA).
Gross Non-Performing Assets (GNPA)
GNPA is a straightforward gauge, essentially telling you the total value of loans that have hit a rough patch without factoring in provisions. It’s like a quick health check for a financial institution’s loan portfolio, calculated by dividing the non-performing loans by the total loan portfolio.
Now, when it comes to keeping that GNPA in check, financial institutions pull out all the stops. For example, the MD of Poonawalla Fincorp, Abhay Bhutada, says their new book is doing well with a 90-plus delinquency rate of less than 0.5 percent. That’s a good performance right there.
And then there’s Mahindra & Mahindra Financial Services, as shared by their Vice Chairman and Managing Director, Ramesh Iyer. They’re on a mission to shrink the gross Stage 3 asset ratio or GNPA share by the end of the current financial year. Armed with a provision coverage ratio of 60%, they’re planning to roll up their sleeves and reach out to customers, aiming to settle or terminate loans and bring that GNPA down even further.
Net Non-Performing Assets (NNPA)
On the flip side, NNPA offers a more nuanced assessment of a financial institution’s asset quality. It takes into consideration the provisions earmarked for problematic loans. Essentially, NNPA refines GNPA by factoring in the amounts set aside to cushion potential loan losses.
This metric provides a more sensible perspective on the true impact of non-performing assets on a financial institution’s overall financial well-being. By accounting for funds already reserved for potential losses, NNPA presents a more accurate portrayal of a financial institution’s stability.
Key Differences Between GNPA and NNPA
● The entirety of non-performing loans is encapsulated by GNPA, without taking provisions into account. In contrast, NNPA factors in provisions allocated for troubled loans while measuring the scope of non-performing assets.
● The attention of investors is often drawn to NNPA due to the direct effect it has on the profitability of banks.
● A more precise evaluation of the actual financial health of the institution is unveiled by NNPA, which meticulously considers provisions.
● Portfolio management is entrusted to GNPA by bank management, while the assessment of provisions and financial impact is handled by NNPA.
What Motivates Financial Institutions to Minimize Their NPAs?
● Capital Protection
NPAs denote loans or assets facing the potential of non-repayment. By minimizing NPAs, financial institutions can protect their capital, ensuring they retain enough funds to take care of operational expenses, comply with regulatory requirements, and mitigate potential future losses.
● Future Expansion
The rates of NPAs play a pivotal role in shaping the future trajectory of a financial institution. They can directly influence its financial well-being, profitability, and risk management. Elevated NPA rates can result in the depletion of capital, regulatory penalties, and diminished investor confidence.
Abhay Bhutada, Poonawalla Fincorp’s MD, conveyed confidence in the institution’s future, foreseeing no challenges in the next four to five years. He has also mentioned about their decision to steer clear of the new credit segment as a contributing factor to this confidence. Maintaining a net NPA below one stands as a key goal for them, illustrating how financial institutions incorporate NPA rates into their plans for the future.
● Boosted Investor Trust
A significant presence of NPAs has the potential to diminish confidence among investors and shareholders. The reduction of NPAs sends a signal to investors that financial institutions are proactively handling risks and striving to safeguard their investments.
● Improved Liquidity Control
When financial institutions cut down on NPAs, they get a chance to loosen up some cash and boost their liquidity. That extra money can then be put to good use, like granting loans to those with good credit, supporting growth plans, or diving into profitable ventures.
Conclusion
Mastering these two metrics is indispensable for making well-grounded decisions, navigating risks effectively, and fortifying the stability of the financial system. Through unraveling the complexities of GNPA and NNPA, one now has insight into the fundamental indicators essential for evaluating non-performing assets in the ever-evolving world of finance.
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