What is NPA? How is it bad for Banks?

What is the non-performing asset? 

image source: Housing

Which bank should you avoid putting money in it?

Here is the long form of NPA is a non-performing asset.

When Bank give a loan then that loan will become an asset for the bank. why? Because Bank makes money by giving loans and charging interest on them. 

But when that loan does not repay by the lender to the bank then it became a non-performing asset called an NPA. This NPA is also called bad loans for a bank. 

Now you understood why these are called bad loans because they don't work for the bank and become a liability to the banks.

This is why a bank's risk is measured by the NPA of the specific bank. 

In most cases, NPA increases in the bank by giving loans to the corporate segments. The corporate segment is highly volatile and risky. They do not provide any guarantee to lead the market and repay the loan. While the retail segment is considered a low risky segment as there are very less chances of defaults.  

So if Bank has higher exposure in the corporate loan suite means so it means you should avoid that bank. 

Here are 5 banks that have the highest NPA:

1. IDBI Bank 

 The five-year average gross NPA ratio of 26.2 is IDBI Bank. This means that of every rupees hundred in the loan given by IDBI Bank rupees 26.2 is not recovered by the bank. 

The bank's 5-year average net ratio is 9.23.

This Bank has a total written-off bad loans worth rupees 460 billion. 

2. Indian Overseas Bank (IOB) 

Second, on the list, are Indian overseas banks with a 5-year average gross NPA of 19.2 and a 5-year average net NPA of 9.83.

BANK HAS GIVEN A CORPORATE LOAN AND AROUND 40% OF THAT REPORTED AS BAD LOANS. 

3. Central Bank of India

This bank with 5 years average gross NPA ratio of 18.81 and a 5-year net NPA ratio of 8.49. 

This Bank also has the highest NPA due to giving corporate loans. 

From the given total loans, 35% of loans haven't been repaid yet and are considered bad loans. 

4. UCO Bank

This Bank has a 5-year average gross NPA ratio of 18.62 and a 5-year net NPA ratio of 8.23. 

This Bank has exposure in infrastructure, metals and construction and that is not repaid around 26% of the advance loan is not repaid and reported as a bad loan. 

5. Punjab National Bank

This bank has a 5-year average gross NPA ratio of 14.95 and a 5years average net ratio of 7.42. 

This bank has a corporate loan book of around 48% which has exposure to many industries like roads and ports, energy, basic metals, telecom, textile, chemicals and others. 

 

These are the PSU Bank that has the highest NPA and the worst performing Bank in terms of bad loans. 

Compare to the PSU banks Private banks tend to give loans to the retail sector than the corporate sector. As I told you earlier, the retail sector is most likely a low-risk sector. 

So compared to the PSU banks private banks have low NPA and hence have fewer bad loans.

 

As you can see there is a massive difference between PSU bank's net NPA ratio and private bank's NPA ratio, this is due to the loan segment in which they operate. 

 Image source: Groww

In the above image, the Bank of Nifty 100 having the highest NPA is shown. The highest NPA is generally seen in the PSU banks. 

Now you can take a call based on the data provided. In which bank do you want to invest? 

Do comment your thoughts on this, I would like to read your commentary on this.

MITHILESH 

GrowwAsset