How to calculate gross NPAS for banks
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Hello,
I had answered a similar question at Quora. Reproducing it here for your reference:
Very simply put - Net NPAs = Gross NPAs - provisions.
Now what are provisions?
Provisioning basically means that the banks estimate that a particular borrower may not be able to pay back the loan in full and hence make a provision of the amount they could loose (as in that won’t be paid back to banks). Banks start creating provisions on a loan given when the borrower starts defaulting on his repayment installments.
Provisioning is a common concept in all businesses - non banking businesses make provisions of bad debts for the money they estimate wont’t be able to receive from their customers.
Now, how much minimum amount is to be provisioned is provided by RBI guidelines and not left completely at the discretion of banks. Varying on the stage of NPA, sector and whether the loan is secured or unsecured, different percentage of provisions have been provided by the RBI which banks have to follow. Broad guidelines are like this:
Non NPAs - 0.4% of the total loans and advances in this category
First stage of NPA - 15% for the secured amount and 25% for unsecured amount is provisioned.
Second stage of NPA - 25% for the secured amount and 40% for unsecured amount is provisioned.
Third stage of NPA - 100% of amount is provisioned.
Please note that the above are only broad guidelines.
Gross NPA is the amount outstanding in the borrowal account, in books of the bank other than the interest which has been recorded and not debited to the borrowal account. Net NPAs is the amount of grosss NPAs less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of provisions held in respect of NPAs and (3) amount of claim received and not appropriated.
The Reserve Bank of India defines Net NPA as
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).
I had answered a similar question at Quora. Reproducing it here for your reference:
Very simply put - Net NPAs = Gross NPAs - provisions.
Now what are provisions?
Provisioning basically means that the banks estimate that a particular borrower may not be able to pay back the loan in full and hence make a provision of the amount they could loose (as in that won’t be paid back to banks). Banks start creating provisions on a loan given when the borrower starts defaulting on his repayment installments.
Provisioning is a common concept in all businesses - non banking businesses make provisions of bad debts for the money they estimate wont’t be able to receive from their customers.
Now, how much minimum amount is to be provisioned is provided by RBI guidelines and not left completely at the discretion of banks. Varying on the stage of NPA, sector and whether the loan is secured or unsecured, different percentage of provisions have been provided by the RBI which banks have to follow. Broad guidelines are like this:
Non NPAs - 0.4% of the total loans and advances in this category
First stage of NPA - 15% for the secured amount and 25% for unsecured amount is provisioned.
Second stage of NPA - 25% for the secured amount and 40% for unsecured amount is provisioned.
Third stage of NPA - 100% of amount is provisioned.
Please note that the above are only broad guidelines.
Gross NPA is the amount outstanding in the borrowal account, in books of the bank other than the interest which has been recorded and not debited to the borrowal account. Net NPAs is the amount of grosss NPAs less (1) interest debited to borrowal and not recovered and not recognized as income and kept in interest suspense (2) amount of provisions held in respect of NPAs and (3) amount of claim received and not appropriated.
The Reserve Bank of India defines Net NPA as
Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).
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