How does NPA affect the balance sheet of a bank?

By Ritesh|Updated : September 3rd, 2022

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.

NPA Impact on Balance Sheet

What factors led to the increase in non-performing assets in India?

  • The economy had tremendous growth between 2004 and 2009, encouraging businesses to borrow money from banks aggressively.
  • The infrastructure sectors, including highways, power, aviation, and steel, received the most of the investment.
  • banks' lax lending standards, without considering the businesses' financial standing and credit ratings
  • The suspension of mining projects and the delay in obtaining environmental permits caused an increase in the price of raw materials and a significant mismatch between supply and demand, which impacted the steel, iron, and power sectors.
  • It impacted the businesses' ability to pay back bank loans, creating non-performing assets (NPA).

Difference between Bank fraud and Non-Performing Assets

  • Banks have long been plagued with non-performing assets.
  • The government of India and the Reserve Bank of India have redoubled their efforts to address the issue of non-performing assets.
  • There is a distinction between NPA and bank fraud:
  • Bank fraud is a crime; non-performing assets are loans or advances when the interest or principal installments are 90 days past due.
  • According to the Reserve Bank of India (RBI), an asset stops producing income for the bank when it does so. 90% of India's total NPAs are non-performing assets, valued at around $ 62 billion in public banks.

Summary:

How does NPA affect the balance sheet of a bank?

NPA affects a bank's balance sheet and negatively impacts the bank's ability to offer credit. The confidence of investors, depositors, lenders, etc., is damaged.

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