Tuesday, October 11, 2016

What is a Non Performing Asset (NPA)?

Meaning and Definition:

In the Indian financial parlance, a non-performing asset is a bad loan that is not able to service either interest or principal or both for a period over 90 days.


Indian banks, especially public or government sector (PSU) banks have accumulated huge amounts of NPAs over the past many years. The reasons for NPAs are threefold:

Borrowers deliberately not repaying bank loans;
Even good and healthy companies coming under stress on account of global events – for example the worldwide collapse in commodity prices have stressed producers of crude oil, minerals and metals;
Improper credit decisions by banks;


In order to prevent the collapse of the banking system, like the 2008 Lehman Brothers event, The Reserve Bank of India (RBI), especially under the previous governor Raghuram Rajan, pushed all the banks to rid their balance sheets of bad loans by making adequate provisions for losses. As a result almost all banks have been writing of bad loans in the last few quarters.

In the mean time, The Government of India has also pledged and indeed infusing fresh capital to strengthen the PSU Banks.

Is the cure permanent?

PSU banks have been recapitalized in the past but had fallen back to the old and inefficient ways in the past. It remains to be seen whether this time around the cure is permanent or one more repetitive instance.

Non Performing Asset (NPA) - Slide

Why PFC and REC Shares Are Hammered on the Indian Bourses?

A very thought provoking question indeed. Thank you for raising it. Thank you. The answer as I see it is as follows:
People to tend to categorise and group companies into a category and give all the constituents of the group the same treatment irrespective of their individual merit. Banks and financial institutions fall under one category. Banks have accumulated a large amount of bad loans or ‘Non Performing Assets (NPAs). The Reserve Bank of India (RBI), under the previous governor, had ordered banks to wash their books and make adequate provision for losses arising from NPAs. As a result most of the banks have been declaring losses after making ample provisions against NPAs in the last few quarters and as a consequence their share prices have seen steep declines.

Banks Afflicted With NPAs

REC and PFC also have been making some provisions fir NPAs but to a very small extent. Their margins are also attractive. However the market is showing them the same treatment along with banks and has battered their stocks.
I also noticed that recently (last week) they had shown smart recovery showing 4–6% price increase in a single day.
Finally I totally agree with you. REC and PFC are showing consistently showing good results and have been unjustly battered along with bank stocks. Therefore, this is a good opportunity to buy these two stocks at low prices.
Thank you,
With Best Regards