Gross non-performing assets (GNPAs) and net non-performing assets (NNPAs) are two measures of how bad a bank’s loan portfolio is. GNPAs include all loans that are 90 days or more past due, while NNPAs only include those loans that are 90 days or more past due and have been specifically written down as uncollectible. Understanding the difference between GNPAs and NNPAs is important for investors, as it can help them gauge the strength of a bank’s balance sheet.
What is Gross NPA?
Gross non-performing assets ( Gross NPA) are defined as those advances where interest and/ or instalment of principal remain overdue for a period of more than ninety days from the end of the year.
- In other words, Gross NPA is the sum of all unpaid principal and interest on loans as of the end of a fiscal year. However, if the account has been restructured during the year, only the unpaid amount after restructuring is classified as Gross NPA.
- Gross NPA can be further classified into two categories: secured and unsecured. Secured Gross NPAs are advances where the outstanding loan amount is backed by collateral, such as property or gold.
- Unsecured Gross NPAs are those loans where there is no collateral backing the outstanding loan amount. Gross NPA spiked in recent years due to the global economic slowdown which led to corporate defaults on loan repayment.
As a result, banks were forced to increase their provisions for bad loans, leading to a decline in profits. Gross NPA remains a cause for concern for banks as it erodes their capital levels and increases their exposure to risk.
What is Net NPA?
Net non-performing assets (Net NPA) is a financial ratio that measures the value of a company’s non-performing assets (NPA) minus any provisions and allowances for those assets. Net NPA is used to assess a company’s credit risk and its ability to recover its delinquent loans. A high Net NPA ratio indicates that a company has a high level of delinquent loans and may have difficulty in recovering them. Net NPA is also known as the delinquency ratio or the loan loss ratio.
Difference Between Gross NPA and Net NPA
Gross NPA and Net NPA Gross Non-Performing Assets (NPA) are the total value of a banks Non-Performing Loans. Gross NPAs include all accruals, whether interest or principal, that are overdue by more than 90 days. Net NPAs are Gross NPAs minus any Writedowns and Provisioning.
- In other words, they are what is left of Gross NPAs when you account for any loss mitigation that has been done. The main difference between Gross and Net NPAs is that Gross NPAs include ALL non-performing loans while Net NPAs only include those that have not been written down or provided for.
- Put simply, if a loan is not performing (i.e. the borrower is not making payments), then it will be classified as an NPA. If the loan is more than 90 days overdue, then it will be classified as a Gross NPA. If a bank has made provisions for the loss on the loan (usually by setting aside money in a separate account), then the loan will be classified as a Net NPA.
- Gross NPAs are therefore a more accurate reflection of a banks true exposure to non-performing loans. However, they can be somewhat misleading because they do not take into account any provisions or writedowns that have been made.
- Net NPAs are a more conservative measure of a bank’s exposure to non-performing loans because they exclude any provisions or writedowns that have been made. However, they can be somewhat misleading because they do not take into account the full value of the underlying asset (i.e. the loan).
The best way to assess a bank’s exposure to non-performing loans is to look at both Gross and Net NPAs in conjunction with each other. This will give you a complete picture of the banks current situation and allow you to make an informed decision about its future prospects.
While the gross non-performing assets (NPAs) of a bank are more than its net NPAs, there is still hope for revival. The government and Reserve Bank of India have taken various measures to clean up banks’ balance sheets and revive credit growth. Let us take a look at some of these steps. Measures Taken by RBI and Government to Revive Credit Growth In February 2018, the RBI announced a scheme called ‘the Scheme for Sustainable Structuring of Stressed Assets (S4A). This scheme allows banks to restructure stressed loans without classifying them as bad loans or NPAs. Banks can also use this scheme to convert debt into equity shares in companies defaulting on their repayments.