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Nonperforming assets (NPAs) and their impact on bank profitability

Posted Date: 05-07-2021 Posted By: user

Banking is the core and fundamental strength of an economy. It decides the financial direction of a nation. It can make a critical commitment in wiping the issues like joblessness or destitution. Hence, it is essential that the banking system in a country is always in a healthy state.

According to RBI Norms, an asset will be termed as NPA or Non-Performing when its payment of principal or interest is due for more than 90 days. It is considered non-performing if an asset fails to make income on the due date. The growth of NPA is always a matter of concern and npa management is necessary to maintain the good health of banks.

How does NPA make a bank unhealthy?

Challenges in front of Indian banks

Indian banks are dealing with the problem of NPA and its impact on profitability. The rise of NPA reduces the bank rates and hits the customers directly. As a result, the inflow for investment goes down. Cash reserve ratio and liquidity ratio also get affected by NPA. It brings down the confidence of shareholders.

Larger borrowers not paying the interest and principal on time result in the rise of NPA and downfall or profitability. These loans get converted into bad loans ultimately.

When large numbers of npa debt settlement cases are there, banks have to spend heavily, and it impacts the bottom lines.

Research shows that NPA kills the profitability

The research shows that NPA kills the profitability of Indian banks. Hence, banks should review their existing credit appraisal and monitoring policy. If any loopholes are found in the existing system, then they should be bridged.

A recovery system has to be in place. All disputed cases need to be forwarded to the tribunal. An effective npa management process can be implemented by strengthening loan recovery methods.

An inadequate recovery process will not be able to control the situation. Studies have found that banks that handle the management of NPA better could control the situation fast.

Factors such as industrial sickness, frequently changing government policies, poor credit assessment system, and managerial deficiencies were the major contributing factors.

Since the impact is severe, it is essential to control the increase in the NPA. This problem must be taken seriously or else it will hit the overall performance of banks heavily. The decrease in the profitability of banks has a direct impact on the economic wellbeing of our country.