In an ideal scenario, banks would like to have zero Non-Performing Assets (NPAs). This means all their loans are being repaid on time and generating income through interest.
However, in the real world, some loan defaults are inevitable. Regulatory bodies like the Reserve Bank of India (RBI) set guidelines to classify loans as NPA if repayments are overdue for more than 90 days.
Here’s how NPA levels are generally viewed for banks:
Lower is better: A low NPA ratio indicates a healthy bank with strong credit assessment practices and a low risk of bad debts.
Acceptable range: There can be a range considered acceptable depending on the economic climate and the bank’s overall risk profile. For example, S&P Global expects Indian banks’ NPAs to drop to 3.5% by FY 2024-25 [1].
It’s important to note that NPA is just one factor to consider when evaluating a bank’s health. Other factors include profitability, capital adequacy, and asset quality.
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