Definition:

Total Non-Performing Assets (NPA) refers to the sum of all loans and advances that are in default or in arrears. In the banking sector, an asset becomes non-performing when it ceases to generate income for the lender, typically when the borrower has not made scheduled payments for a specified period.

Examples

Examples of NPAs include loans where the borrower has not paid the principal or interest for 90 days or more, overdrafts that have not been serviced for 90 days, and bills that remain overdue for a similar period.

Formula:

Total NPA = Sum of all non-performing loans and advances

How to use the metric:

The Total NPA metric is used by financial analysts and bank managers to assess the credit risk and financial health of a bank. A high NPA indicates potential problems with the bank's loan portfolio and can affect profitability and capital adequacy.

Limitations:

The metric does not provide insights into the reasons behind the non-performance of assets. It also does not account for the recovery potential of these assets or the provisions made by the bank to cover potential losses.

Applies to:

This metric is most relevant in the banking and financial services industry, where lending and credit risk management are core activities.

Doesn't apply to:

Industries that do not engage in lending or credit activities, such as manufacturing or retail, do not typically use this metric as it does not relate to their primary business operations.

Summary:

Total Non-Performing Assets (NPA) is a critical measure for banks and financial institutions to evaluate the quality of their loan portfolio. While it provides a snapshot of credit risk, it has limitations in terms of understanding underlying causes and recovery prospects. It is primarily applicable to the banking sector and less relevant to non-lending industries.