Financial Stability Report
What is NPA?
- A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
- Banks classify NPAs further into Substandard, Doubtful and Loss assets.
- Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
- Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets: Loss asset is considered noncollectable and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.
- With respect to agriculture, a loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons.
- A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season.
Capital to Risk-weighted Assets Ratio (CRAR)
- CRAR, also known as Capital Adequacy Ratio (CAR), is the capital needed for a bank measured in terms of the assets or loans disbursed by the banks. It measures capital adequacy in terms of riskiness of the assets or loans given.
CAR = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets)
- According to the RBI’s capital adequacy norms, banks (including RRBs) are required to maintain CRAR at 9%.
Why in News?
- The RBI has released its Financial Stability Report, July 2020.
Highlights of the report
- The gross non-performing assets (GNPA) ratio of scheduled commercial banks (SCBs) could worsen to as high as 14.7% by the end of the current financial year, from 8.5% in March 2020, if the adverse economic impact of the COVID-19 pandemic was ‘very severe’.
- Observing that the capital to risk-weighted assets ratio of SCBs edged down to 14.8% in March, from 15% in September 2019, the RBI projected that this ratio could slide to 13.3% in March 2021 under the baseline scenario and to 11.8% under the very severe stress scenario.
- Bank credit which had considerably weakened during the first half of 2019-20, slid down further to 5.9% by March 2020 and remained muted up to early June 2020.
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