How does NPA Affect the Balance Sheet of a Bank?
By BYJU'S Exam Prep
Updated on: November 9th, 2023
The financial health of banks is impacted when their balance sheets include a large percentage of non-performing assets (NPA). It has a detrimental effect on the banks’ capacity to extend credit and erodes the trust of investors, depositors, lenders, etc. A non-performing asset (NPA) is a loan or advance on which the principal or interest payment has been late for 90 days.
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NPA Impact on Balance Sheet of Bank
The economy had tremendous growth between 2004 and 2009, encouraging businesses to borrow money from banks aggressively. Highways, power, aviation, and steel received the most investment due to banks’ lax lending standards, which did not take into account the businesses’ financial standing and credit ratings.
- The halting of mining projects and the delay in obtaining environmental permits resulted in an increase in raw material prices and a significant mismatch between supply and demand, affecting the steel, iron, and power sectors.
- It had an impact on the business’s ability to repay bank loans, resulting in non-performing assets (NPA).
Difference between Bank Fraud and Non-Performing Assets
Non-performing assets have been a problem for banks for a long time. The Indian government and the Reserve Bank of India are working harder than ever to solve the non-performing asset problem. There is a difference between bank fraud and NPA:
- Non-performing assets are loans or advances where the interest or principal payments are 90 days past due. Bank fraud is a crime.
- An asset ceases to generate income for the bank when it does, according to the Reserve Bank of India (RBI). Non-performing assets in public banks total $ 62 billion in value and account for 90% of all NPAs in India.
Summary:
How Does NPA Affect the Balance Sheet of a Bank?
The financial stability of banks is impacted when their balance sheets have a high percentage of non-performing assets (NPA). It has a damaging effect on the banks’ capacity to raise credit. It corrupts the depositors, the trust of investors, lenders, etc.
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