NPA, or, Nonperforming assets are the loans that have been left unpaid for a long time after the completion of the repayment time. Such assets are added to the balance sheets of the bank after a long period. NPA’s are a kind of burden to lending financial institutions.
NPA is termed as a bad debt of the lender when it is not returned after 90 days. Usually, 90-day period is a standard period, however, the time can be longer or shorter as mentioned in the terms and conditions at the time of lending. The higher the NPA of the financial institution, the lower is the potential of the institution to earn interest and ultimately less is the profitability. Based on the calculations of the NPA it is termed as Gross NPA or Net NPA.
Gross NPA vs Net NPA
The difference between gross NPA and net NPA is that Gross NPA is the nonperforming asset that includes both the principal and the interest amount while Net NPA is the asset obtained after subtracting provisions from the initial amount.
Gross Nonperforming asset is calculated by adding both the interest and the principal amount. Net Nonperforming asset is calculated by deducting the provisions for a doubtful and bad debt from the original asset. In other words, Net NPA is the amount obtained on provisions from Gross NPA.
Comparison Table Between Gross NPA and Net NPA
| Parameter of Comparison | Gross NPA | Net NPA |
|---|---|---|
| Basic definition | Gross NPA is the amount obtained on adding principal and the interest on it. | Net NPA is the amount obtained on deducting provisions from gross NPA. |
| Formula for calculation | Gross NPA= (A1+ A2+…………….+An)/ Gross Advances, here, A1 to An is the amount lent to persons 1 to N. | Net NPA= (Gross NPA- Provisions related to unpaid debt)/ Gross Advances. |
| Actual loss incurred | Gross NPA is not the actual loss incurred to the financial institution. | Net NPA is the actual loss faced by the financial institution. |
| Default period | The institution gives a grace period after which the principal with interest is to be repaid, after the expiration of this period it becomes nonperforming. | Net NPA does not offer any grace period. |
| Effects on the financial institution | Gross NPA harms the market image of the institution and its equity value. | Net NPA affects the liquidity and profitability of the company. |
What is Gross NPA?
Gross NPA is the summation of the principal and the interest to be paid on it. It shows that the landed amount is at the potential risk of being unpaid. In other words, Gross NPA is the sum of all NPA assets. The formula for calculating Gross NPA is-
Gross NPA= (A1+A2+A3+A4+……………..+An)/Gross Advances
Here, A1 to An represents the amount of loan for the person 1 to n.
The institutions give a grace period of 90 days to the person after which the loan is to be repaid on failing which the asset becomes Gross NPA. However, Gross NPA is not the actual loss to the lending institution but it is the loss of both the principal and the interest.
The ratio of the gross NPA shows the asset quality of the company, the higher the ratio, the lower is the asset quality. The ratio of Gross NPA is defined as the ratio of total gross NPA to the total advances of the institution.
Gross NPA is caused by the poor implementation of governmental policies, natural calamities, industrial sickness, etc. Gross NPA defames the goodwill or image of the institution and lowers the equity value of the company.
What is Net NPA?
Net NPA is the difference in gross NPA and provisions for bad and doubtful debt. It is the amount obtained when the principal amount is deducted by the payments received from the person who has lent the amount. Net NPA is calculated by the following formula-
Net NPA= ( Gross NPA- provisions of unpaid debt)/ Gross Advances
Net NPA does not give any grace period, the loan becomes Net NPA immediately. Net NPA is the actual loss faced by the lending institution. The credit institution provides for the unpaid loan and thus the paid amount is deducted from the initial amount which gives the actual loss of the company.
Net NPA to advances ratio is the ratio of the Net NPA to the Net Advances. It measures the quality of the loan of the institution and the overall health of it.
Net NPA is caused by the low number of provisions for the unpaid debts. The higher amount of Net NPA affects the liquidity and profitability of the company. It shows the company is going in a loss.
Main Differences Between Gross NPA and Net NPA
- Gross NPA is the summation of the principal and the interest that is left unpaid after the repayment period while Net NPA is the amount obtained on deducting provisions from gross NPA.
- Gross NPA gives a grace period after which the loan is to be repaid while Net NPA does not give any grace period.
- The asset becomes gross NPA after a period while it becomes net NPA immediately.
- The asset becomes a gross NPA after 90 days while it is not the case with Net NPA.
- Gross NPA is not the actual loss of the institution while Net NPA is the actual loss faced by the financial institution.
- Gross NPA defames the goodwill of the financial institution and also reduces its equity value while Net NPA affects the liquidity and profitability of the company.
- Gross NPA is caused by natural calamities, poor governmental policies and their implementations and industrial sickness while Net NPA is caused by the low provisions for the unpaid debts.
- The higher ratio of gross NPA is an indication that the asset quality of the lending institution is in poor condition while Net NPA shows that the overall financial condition of the institution is poor.
Conclusion
May it be Gross NPA or Net NPA, they always affect the company in a bad way, they force the company to face loss. Large NPA’s can cast a potential negative shadow on the image of the company.
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