Nowadays everyone wants good profit in stock markets in the short term. For that, we are here to educate you on how to gain more profit by investing in the stock market. Today’s topic is How to analyse banking stocks by Nonperforming Assets(NPA)? Recently in our budget government boosting the economy. It directly or indirectly effecting to banking. Let’s understand how to analyse banks.
First of all, we have to understand how the Banks earns a profit. Generally, the bank’s main income source is interesting. When customers, retail or corporates are not able to pay loans or interest for a significant period of time it is considered as Nonperforming assets (NPA).
Loans are assets for banks. Why? Because banks make a profit out of these loans. They earn interests as profits. When some entities are not able to pay their loan or interests. It’s known as Nonperforming assets (NPA). In other words, we can say that if banks are able to recover the amount of loan it becomes the asset that is not generating any type of income for the bank.
Reserve Bank of India (RBI) defines some rules that define when assets become nonperforming assets to a particular bank. RBI defies that if any assets (Loans) are not generating any type of income for 90 days It becomes the nonperforming assets. There are several types of NPA such as…
- Sub-Standard Assets
- Doubtful Assets
- Loss Assets
If any assets are not able to generate any type of income for less than or equal 12 months its known as Sub-Standard Assets. But if the asset does not generate profit for more than 12 months it becomes doubtful Assets. Because the name itself explains these assets are doubtful that they will generate income in future.
Generally, Banks are works mainly on mortgage base loans. It means if any entity is not able to pay their loan then the bank seizes their mortgage and try to recover that asset value. But when it is not possible to recover that asset value even after the auction of that mortgage then it will be considered as the loss Assets.
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According to RBI rules, every single bank must have to declare their NPAs in quarterly and annual results. In the results, there is a section called Balance Sheet where we can find the NPA. There are two types of NPAs are declared there.
Every bank must do a provision. The provision means all banks need to keep aside some amount of their profit aside for the NPAs. It means that banks need to reserve some capital which is part of their profit kept aside according to Nonperforming assets.
Gross Non-performing Assets (GNPA)
Gross Nonperforming Assets tells you the total amount of gross NPAs. It will consider the provision and NPA both. This means that it indicated many provisions are made for how many Nonperforming Assets.
Net Nonperforming Assets (NNPA)
NNPA stands for Net Nonperforming Assets. It is denoted as net assets after subtracting the provisions from the gross NPAs. It means that it represents the net total Nonperforming Assets of the bank.
In conclusion, we can say that Nonperforming Assets are the assets that are not generating any type of income for the bank or finance firms. If any bank has more NPAs then it is considered a bad sign. If any bank significantly reduces its NPAs it is a good sign for that particular bank or financing firm. This is the only parameter, we can not analyse a banking stock over only NPAs we have much more things to analyse the banking stock.