CHAPTER 2

CONCEPTUAL FRAMEWORK OF NPAs

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 CONCEPTUAL FRAMEWORK OF NPAs

The fast expansion and during the couple of decades preceding bank
nationalisation in 1969, the financial industry's growth in terms of
existence was genuinely extraordinary. Even as the banking system's
branch network grew at a rapid and vast rate in the early 1990s, it
became evident that the monetary system's efficiency should be assessed
not only in terms of quantitative growth (bank branch enhancement and
growth in deposits or advances), but also in terms of qualitative growth
(fulfilling social responsibility). Following the first phase of economic
liberalisation in 1991, the banking industry, and therefore credit
management, underwent significant changes. While banks' major
purpose is to lend money to a variety of industries, including
agricultural, small-scale industry, microcredit, education loans,
personal loans, housing loans, and industrial loans, among others.

2.1 Concepts of NPA

“The saying " Lacking wealth, a person is just like a bird without
feathers." highlights the importance of money. A bank is a type of
financial institution that specialises in dealing with money. Accepting
and lending money are the basic activities of all commercial banks.
Banks play a critical role in capital mobilisation and allocation to
priority and non-priority sectors for an economy's advancement and
development. Accepting and lending money are the basic activities of
all commercial banks. Banks play a critical role in capital mobilisation
and allocation to priority and non-priority sectors for an economy's
advancement and development. The major issue that commercial banks
have is successfully disbursing money to high-quality assets (loans and

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advances), lest they become NPA. When a bank is able to Manage or
overcome both external and internal factors and obstacles, as well as
keep up with new technology developments, it is considered to be
efficient. The solid financial system of a country is a significant
component in that country's economic prosperity.

The primary role of the banking industry is to receive client deposits in

order to lend money. As a result, it mobilises cash and then loans them
to others, resulting in bank assets. The money that has been mobilised
is lent in the form of loans and advances, which is the major and
principal activity of banking and makes up the bank's greatest asset.
The money lent is referred to as loans or advances, and it assists the
bank in earning income in the form of interest. In addition, the bank
invests a portion of its funds in securities or instruments (debt as well
as equity), and a smaller portion of available total funds is invested in
real assets such as land and buildings, office equipment, and other
banking-related assets.

Money is supplied in the form of loans with the intention of receiving

interest payments at fixed regular intervals, as per the lender and
borrower's contractual responsibilities. The asset that fulfils its
contractual responsibilities, such as paying interest on time and
repaying principal when it is due, is referred to as a performing asset or
a standard asset. Non-performing or non-standard assets are assets that
fail to satisfy their commitments of timely interest payment and
principal repayment within a certain time period.

The Reserve Bank of India defines a non-performing asset as one that

fails to generate income for the bank within the specified time frame. In
other words, if interest or principal instalments are not paid for a length

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of time as specified in RBI rules and regulations, an asset shall be
termed

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and handled as a nonperforming asset (NPA).

The following are the criteria for declaring an account as NPA, as per
RBI guidelines and rules and regulations: -

 In the case of a term loan, interest or principal instalments stay

unpaid or past due for more than 90 days.

 In the case of an Overdraft or Cash credit, the account stays out of

order or idle for more than 90 days.

 In the event of bills acquired and discounted, bills stay late or

unpaid for longer than 90 days.

 For one Crop season for extended duration crops, the principle or
interest instalment is overdue or underpaid.

 Interest or principal instalments are overdue or unpaid for two

harvesting seasons, but not more than two and a half years in the event
of a loan for agricultural purposes.

 In the case of other accounts, any money due to be received has

been late or underpaid for more than 90 days.” (Bansal, 2015)

2.2 Norms for asset classification and provisioning:

The following are the major categories into which banks divide their

loan assets:

-Standard Assets

-Sub-standard Assets

-Doubtful Assets and

-Loss Assets

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 Figure: 2.1 Classification of Assets

Standard Assets:

Standard assets are assets that provide income on a regular fixed

interval basis and do not pose an additional risk to the firm. These

assets called Performing Assets.

(a) 0.25 percent direct loans to the agriculture sector and Small and

Micro Enterprises (SMEs).

(b) 1.00 percent growth in the commercial real estate sector.

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(c) 0.75 percent advances in the Home Housing Sector – Corporate

Real Estate (CRE - RH).

(d) All additional loans and advances that aren't governed by the policy

(a), (b), or (c) at a rate of 0.40 percent.

Sub-standard Assets:

Non-performing assets are any assets that aren't standard. These are the
following: Sub-standard Assets: A non-performing asset which has
been non-performing for under or equal to one year is considered sub-
standard. The assets are distinguished by the distinct likelihood that the
bank would suffer a loss on certain types of assets, thus the bank must
set aside 15% of the outstanding amount of sub-standard assets.

 A general provision of 15% on the entire outstanding balance shall

be provided, with no adjustments for ECGC guarantee cover or
available securities.

 Unsecured exposures classified as "sub-standard" would be subject

to a 10% extra provision, for a total of (15% + 10%) 25% on the
outstanding asset account amount. Infrastructure loan portfolios that are
categorised as sub-standard, but in the other hand, will be subject to a
provisioning rate of 20% rather than the previously stipulated 25% due
to numerous safeguards, such as escrow accounts.

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Doubtful Assets:

Assets that have been nonperforming for more than a year but are not
declared loss assets are referred to as doubtful assets. After netting
realised amounts under the DICGC scheme and sums of guarantee
cover that have been realised or are likely to be realised under the
ECGC (Export Credit Guarantee Corporation) schemes, banks must
provide 100 percent of the outstanding advance of unsecured assets
portion. (PARMAR, Vol. 3, Issue 3, April 2014)

Up to one year: 100% of the unsecured component and 25% of the

secured portion.

100 percent of the unsecured part and 40% of the secured portion
for 1 to 3 years.

Over 3 years: 100% of the unsecured part and 100% of the secured
portion

Loss assets:
Banks have recognised a lost asset, but it hadn't been fully or partially
wiped off. In other words, despite the fact that it may have some scrap
or recovery worth, such an asset is regarded uncollectible. However,
only those assets that have no security are classified as loss assets.
Asset portfolios with some form of security, DICGC, or ECGC
insurance were n’t loss assets. Banks are supposed to setup a hundred
percent provision for lost assets. (Sukul, 2017)

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 Figure: 2.2 Provisioning norms of NPA
TYPES OF PROVISIONING NORMS
ASSETS
(a) 0.25 percent direct advances to the agriculture and
Small and Micro Enterprises (SMEs) sectors.

(b) 1.00 percent growth in the commercial real estate

sector.
Standard
Asset (c) Commercial Real Estate Advances – Residential
Housing Sector (0.75%).

(d) 0.40 percent for all additional loans and advances

not covered by (a), (b), or (c) above.
(i) A general provision of 15% of total outstanding
should be provided, with no adjustments for ECGC
guarantee cover or accessible securities.

(ii) The ‘unsecured exposures' designated as

‘substandard' would be subject to an additional
Substandard provision of 10%, for a total provision of 25% on the
Asset outstanding sum. Infrastructure loan portfolio that are
considered as sub-standard Instead of the previously
specified prescription rate of 25%, a provisioning rate of
20% will be used. due to specific protections such as
escrow accounts accessible in relation to infrastructure
financing.

Within one year: 100% of the unsecured component and

25% of the secured component.

100 percent of the unsecured component and @ 40% of

Doubtful
Assets the secured component for 1 to 3 years.

Over 3 years: 100% of the unsecured component and

100% of the secured component.

100% of the unsecured component and 100% of the

Loss assets
protected component.

(RBI, 2015)

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The following formula may be used to calculate provisioning
requirements:

Total provision = [B-S (100-P)/100]*(1-C/100)

Where;

B = Outstanding balance in non-performing assets accounts.

S stands for the assets' realisable value.

P = The percentage of provision necessary for the secured component,

based on the account's age and doubtfulness.

C = Available DICGC/ECGC cover as a percentage of total

outstanding amount.

When a DICGC or ECGC cover limit is set, it must be translated to a

percentage.

2.3 Types of NPAs:

Gross NPAs and Net NPAs are the two types of nonperforming assets
(NPAs).
Gross NPA:
Gross Gross NPA
NPA Ratio =
Gross Advances

Gross nonperforming assets (NPAs) are advances that are regarded

irrecoverable or unpaid for which the bank has made provisions and are
nevertheless recorded as assets in the bank's books. To put it another
way, it's the accumulation of all NPA like sub-standard, dubious, and
lost assets.

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 Net NPA:

Gross NPA - Provisions

NET NPA Ratio=
Gross Advances

After subtracting the aforementioned stated adjustment from gross

NPAs, net NPA reflects the banks' real burden.

The Reserve Bank of India defines net non-performing assets as: Net
NPA= Gross Non-Performing Assets – (Balance in Interest Suspense
account and DICGC/ECGC Part outstanding balance and kept in
suspense account, and total provisions maintained).

Gross NPA reflects problematic assets, whereas Net NPA reflects the
actual strain on banks. (Agwan, Volume 6, Issue 1 (January, 2016))

2.4 Identification of NPAs

The process of determining whether an asset or account is performing

or not is known as NPA identification. The identification of
nonperforming assets (NPA) has to be done or decided on the basis of
the situation as of
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the balance sheet date. As a result, even if the account has been in
default for two quarters, an advance that has been recorded by
repayment of outstanding interest and instalment of principle before the
balance sheet date may not be considered as NPA. The following is a
method for determining if an asset is performing or non-performing:

Non-performing asset (NPA) revenue is not recognised on an accrual

basis in other countries, and is only taken into account as income when
it is actually received. To harmonise, it was agreed to follow a similar
procedure in our country. On all NPAs, the bank has been instructed
not to charge interest or accept interest revenue. When an asset ceases
to generate revenue for a bank, it is classified as non-performing. From
1992 to 1995, the basis for classifying all credit facilities as non-
performing was lowered to 4, 3, and 2 quarters, and from April 2004,
this two-quarter definition was reduced to one quarter, and the
following is the grounds for classifying a credit facility as non-
performing:

 Cash Credit / Overdraft

Interest payable up to September 30th of the audited year is collected on

or before 31st March of the relevant audited year.

NPA — Interest payable by 30 September that has not been collected

up to by 31st March of the relevant audited year.

If a cash credit or overdraft account stays ‘out of order' for two quarters
(not necessarily consecutively) during the year, it will be classified as a
nonperforming asset (NPA).

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Out of order

If any of the following three requirements are satisfied, an account

may be regarded or considered out of order:
 The sum outstanding in the account stays continuously in
excess of the sanctioned limit or drawing capacity as per terms and
conditions.
 The outstanding amount is within the limit/drawing power,
but there have been no credits in the account for a period of six
months on the bank's balance sheet date;

 There are some credits, but they are insufficient to meet the
interest or principal owing to the account over the same period.

 Term Loan

Performing Assets - Interest due by June 30 and instalments due by

August 31 of the audit year, collected by March 31 of the audit year.

Non-performing Assets: Interest due up to June 30 and instalments

due up to March 31 of the audited year were not collected before
March 31.

A term loan account is classified as a nonperforming asset (NPA) if

the interest on the loan or a principal instalment is ‘PAST DUE' for
two consecutive quarters out of four, however the default need not be
ongoing.

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Past due: If an amount is outstanding or unpaid for 30 days or more
after the due date, it is called past due.

 Bills Purchased and Discounted

Interest due up to June 30 and instalments due up to August 31 of the

year under audit collected before March 31 of the year under audit
are considered Performing Assets.

Non-Performing Assets (NPAs) are bills that are due by September

30th of the year but are not paid by March 31st of the year under
audit.

If a bill is purchased or reduced and stays late and unpaid for two
quarters, it is called a non-performing asset (NPA).

Outstanding interest, on the other hand, should not be levied and

taken into account in relation to overdue invoices unless it is realised.

 Other Accounts

Performing Assets - Interest payable by June 30 and instalments due

by August 31 of the audited year, collected before March 31 of that
year. Interest due until June 30 and/or instalments due until August
31 are not collected before March 31 of the year under audit.

Any other credit facility is recognised or handled as a nonperforming

asset (NPA) if any amount due on such facility is past due for two

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quarters during the year. Interest should not be levied on any NPAs

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and should not be accounted for in the revenue account. If a
borrower's interest income is subject to non- accrual, the same
borrower's fees, commissions, and other comparable revenue should
likewise cease to accrue. (RBI, 2015)

Some other Related Concept of NPAs

 Exempted Assets

Advances against a bank's own term deposits/recurring deposits,

National-Saving-certificates, LIC policies surrender value, IVP Indira-
Vikas-Patras, and KVP Kissan-Vikas-Patras are all completely exempt
from Assets Classification, Income Recognition, and Provisioning, and
are only rarely treated as "Standard Assets."

Even if interest debited for two quarters is not collected, the

outstanding balance must be within the security's value.

 Downgrading of NPA

In respect of those accounts where there is a potential threat of recovery

due to decrease in the value of security or inability to obtain of security,
or the existence of other factors such as borrowers' fraud, the RBI had
instructed banks that Such accounts should be treated as assets as soon
as possible, regardless of how long they have been classified as
nonperforming assets.

 Up gradation of NPAs

Non-performing assets are only evaluated for upgrade when they

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become standard assets, i.e. when the account gets regularised. In other
words, upgrading NPAs in the dubious status from doubtful to sub-
standard would not result in further recoveries unless the account is
brought into good standing and removed off the NPA list.

 Demand and Housing loans to staff

Because monthly due instalments will be recovered on a regular basis,

staff accounts can be considered as typical assets, and interest on such
accounts can be reported as income for the year ended.

 Borrower having several facilities

When a customer has several accounts, all of the accounts must be

considered as non-performing assets (NPAs), not just the one or part of
the account that has been irregular.

 Consortium Advance

Consortium advances are when more than one bank or financial

institution jointly advances a unit. The members should follow the
categorization chosen by the consortium leader in order to achieve
uniformity in approach when it comes to borrowing units. The
information about classification should be shared with other banks by
the leader bank.

 Agricultural Advances

RBI stated in a circular dated March 4, 1998 that advances given for
agricultural purposes may be classified as nonperforming assets (NPA)

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if interest or principal instalments are not paid after two harvest
seasons; in any event, it should not exceed two and a half years.

 Reschedulement of Advances

According to RBI standards, an account that has not yet become NPA
can be rescheduled before production begins or an instalment becomes
due for payment according to the original conditions. In such instances,
the NPA status must be evaluated in light of the rescheduled terms.

2.5 Causes for Non-Performing Assets

The high rate of nonperforming assets (NPAs) in both public and

private sector banking institutions has caused public concern, as bank
lending is the driving force behind the country's economic growth, and
one cause of this is the growing NPAs, which will inevitably have
adverse effects on the economy. The breakdown of the banking
industry might have ramifications in other industries. The Indian
banking sector, which historically functioned in a closed economy, is
now confronted with the problems of operating in a free market. On the
one front, a safe environment guaranteed that banks never needed to
acquire complex treasury functions or Assets Liability Management
capabilities, while on the other, a mix of directed financing and social
banking drove profitability and competition to the background. The end
consequence was unsustainable nonperforming assets (NPAs) and, as a
result, a higher effective cost of banking services. It's a different storey
when the RBI and the government are accused of having a lenient
stance or failing to take extra precautions with banks that fail to meet
specified objectives
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for priority sector lending, notably in agriculture and the small-scale
industry. Externalities might make it difficult to recover NPAs under
priority sector advances, especially in agricultural and small-scale
businesses.

In Indian banks, particularly public sector banks, a number of practical

issues have arisen. For example, under the Prime Ministership of Mr.
V.P. Singh, the Indian government granted a large waiver of fifteen
thousand crores for rural debt in 1989-90. This was not an isolated
event in India, and it left a poor impression on the loan payee. Poverty
alleviation programmes such as IRDP SUME, SEPUP, JRY, PMRY,
and others have failed to fulfil their aims and have had detrimental
consequences. Due to political influence, pressure or abuse of money,
and the unreliability of target consumers in these areas, the massive
amount of loan provided under these schemes was completely
unrecoverable by banks. Bank loans are their assets, and because some
of them were not repaid on time, the quality of these assets was
progressively degrading. The process of allocating credit became
known as the ‘Loan Mela.' Loan proposal review was sloppy, and
repayment was low as a result.

The factors that cause assets to go from performing to non-performing

status have been grouped together under the following three headings
or points.

 Causes Attribute to Borrowers

 The borrowers' unwillingness to repay the loan Many times, a

certain group of debtors makes intentional attempts to declare their
units ill in
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order to receive financial assistance from various sources. Even the
accumulating group of careful borrowers does not hesitate to take
advantage of some banker errors, as they have learned through
experience, and do not repay purposefully, these loans will eventually
become non-performing.

 Using money for growth, modernisation, or the creation of new

initiatives that benefit or promote a sister company If the advance is
misappropriated or diverted to other purposes, the unit may be unable
to earn more revenue, and the account may become non-performing.

 Inappropriate technology and obsolescence of products A company

can't compete in the market with items made with obsolete technology.
As a result, the product stays unsold, causing money to be blocked
without generating any return or giving a minimal return, resulting in
NPAs.

 Because the project was not finished on time, there was a time cost
overrun throughout the project implementation stage, causing liquidity
strain. As a result, the unit would be unable to return the advance on
time, resulting in NPAs.

 Mismanagement and a lack of appropriate planning If management

makes poor judgments, such as investing in too ambitious projects,
creating extra capacity at non-economic prices, or incurring
unnecessary spending, NPAs will result.

 If there is a disagreement between the co-borrowers or if one of

them dies after taking out a bank loan, the manufacturing activity may
not continue to provide enough revenue, resulting in NPAs.

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 Inability of the company to raise funds through the financial
markets by issuing equity or other debt instruments. This will result in
a liquidity crisis or a shortage of money, which will limit production. In
this situation, the end result will be the conversion of such loans into
nonperforming assets (NPAs).

 Exporters encounter difficulties owing to unfavourable currency

rates, overdues in other countries, recession in other nations,
externalisation issues, and other factors. It increases the cost of material
imports and lowers demand, preventing units from increasing at the
right rate since they must compete in the world market with better
efficiency.

 Raw material scarcity, raw material/input price increases, and weak

financial markets are all factors. This inhibits productive actions since
the returns are insufficient.

 Causes Attributable to banks

 Lending Process That Isn't Working commercial banks have

adhered to three fundamental principles of bank lending.
 The profit principle

 Liquidity principle

 Safety principle

 Technology that is incompatible Market-driven choices cannot be

made in real time due to insufficient technology and management
information systems. In banks, proper MIS and financial recording
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systems are not implemented and managed, resulting in poor credit
collection and NPAs. The bank's branches should all be computerised
and up to date.

 SWOT Analysis that isn't appropriate Another cause for the growth
in NPAs is a lack of adequate strength, weakness, opportunity, and
threat assessments. Due to the rise in nonperforming assets (NPAs),
banks rely more on the borrower's honesty, integrity, financial health,
and credit worthiness when making unsecured advances.

 Credit Appraisal System Is Inadequate Another factor contributing

to the growth in NPAs is poor credit assessment. Due to a bad credit
assessment, the bank makes advances to people who are unable to
repay them according to their ability. To reduce NPAs, they should
employ appropriate credit evaluation.

 Inefficiency in management to protect its interests, the banking

should always carefully choose the borrower and take actual assets as
collateral. The following variables should be considered by banks
while accepting securities:
 Marketability\s

 Acceptability\s

 Safety\s

 Transferability.

 Wrong borrower selection, inaccurate evaluation of the borrower's

expertise or competence to pursue the activity intended to be
conducted, thereby jeopardising a fundamental premise of lending. If
the market
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report, creditworthiness, and family background of the borrower are not
thoroughly checked, there is a very significant risk of the fund being
misused.

 Repayment schedule that isn't right Fixing the payback schedule

and gestation duration in the operating region of the brands, notably in
agricultural advances, regardless of the operational and marketing
seasons is also a cause for an asset becoming NPA.

 Improper development of the borrowers' credit requirements Due to

a lack of comprehensive market and industry data on demand and
supply, the bank may be unable to appropriately analyse the borrower's
credit requirements, resulting in under or over financing, which may
change the cost revenue structure of the activity, rendering it unviable.

 Improper evaluation of the project site, geographical drawbacks

and benefits, forward and backward connections, all of which have a
significant impact on the feasibility of the project to be undertaken.

 Coverage of a wide geographic region Injudicious and intermittent

advances with vast coverage areas, limited transportation, and a
staffing deficit, and the inability to maintain effective control over the
advances.

 Delay in credit facility approval or pay-out Due to delayed section

and credit disbursement, units are unable to take advantage of
possibilities.

 Faulty paperwork and loan disbursement prior to compliance with

the terms and conditions may lead to the possibility of fraud or loan
default.
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 For different reasons, there was a lack of monitoring and
inadequate follow-up on the park of the hank branches. An effective
monitoring system has two goals: to ensure that credit is used properly
and to identify problems that may arise during the project's execution.
The lack of such a system will have a negative impact on the
performance of loan assets. If warning signs are not detected quickly
and appropriate remedial measures are not taken, these loans will
eventually become nonperforming assets (NPAs).

 Unavailability of essential data pertaining to the borrower's debts to

other institutions and persons, among other things, impacting his ability
to satisfy all of his payback obligations credit the information
department does not gather and maintain complete information about
borrowers for the bank as a whole. The defaulting borrower takes
advantage of this void and raises cash from one branch of the same
bank while ignoring the other bank's branch.

 Because there are insufficient authorities to enforce securities

(possession and sale), banks are avoiding risks by investing a higher-
than-required share of their assets in sovereign debt papers.

 Manipulation of the debtors by political clout. Due to the demands

of politicians and bureaucrats, a large share of NPAs result from
lending to the priority sector. The NPA problem might have been
controlled, if not eliminated, if banks had properly supervised their
loans. Politicians and bureaucrats compelled bank top management to
pour good money after bad in the instance of dishonest borrowers. The
fundamental cause of NPAs in India is the lack of adequate bankruptcy
laws and other legal procedures for enforcing security claims.

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 Other Causes

 Natural calamity

This is a primary element that contributes to bank nonperforming assets

(NPAs). Because of this, the borrower is unable to repay their loans. As
a result, due to the detrimental impact on bank profitability, banks must
make substantial provisions in accordance with standards.

 Unsoundness in the Industrial Sector

Industrial illness is caused by improper project management, poor

management, a lack of appropriate resources, a lack of advanced
technology, and constantly changing government rules and policies. As
a result, banks fund sectors that lack cutting-edge technology, lowering
their profit and liquidity.

 Insufficient Demand

Entrepreneurs in India were unable to accurately anticipate product

demand, resulting in their inability to repay the money they borrowed
to carry out these operations. The banks are recouping the funds by
selling their assets, but there is still a significant increase in
nonperforming assets (NPAs).

 Government Policies That Are Changing

The banking industry receives new policies for its functioning with
each new government. As a result, it must adapt to evolving concepts
and policies for regulating the rise in nonperforming assets (NPAs).

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2.6 Impact of NPAs on profitability of the Banks

The rising number of nonperforming assets (NPAs) has a significant

impact on both the bank and the economy as a whole. The following
are a few of the consequences:

 The presence of nonperforming assets (NPAs) has a negative

influence on bank profitability. It's a two-edged sword in that banks
don't make any money off of it; instead, they have to spend money to
recover.

 As NPAs rise, banks' attitudes toward lending alter, thereby

impeding bank growth and credit expansion for productive purposes.

 Banks may favour risk-free investments that are neither beneficial

or helpful to the nation's economic growth.

 Banks may raise interest rates to compensate for the loss on

26
nonperforming assets (NPAs), which has a negative impact on the
viability of many businesses.

 Because of the negative impact on the return on investment, NPAs

will limit the earning capability of bank assets (ROI).

 Higher provisioning requirements for rising NPAs have a negative

impact on banks' capital adequacy ratio (Capital to Risk Adjusted
Assets Ratio).

 Banks' Economic Value Add (EVA) is thrown off since EVA is the
difference between net operating profit and the cost of capital.

 Nonperforming assets (NPAs) undermine consumer trust by

lowering the market value of shares, frequently down under their book
value in the capital market.

 Reduces asset earning capacity: Nonperforming assets (NPAs)

diminish asset earning capacity, and as a result, return on assets is
impacted.

 NPAs have a risk weight of 100 percent to the extent that they
are uncovered, according to Block's capital. As a result, they put capital
on hold in order to maintain capital adequacy. Because nonperforming
assets (NPAs) generate no revenue, they have a negative impact on a
bank's capital adequacy ratio.

 Carrying NPAs entails incurring costs such as "Operating Cost

for Monitoring and Recovering NPAs," "Cost of Capital Sufficiency,"
and "Cost of Financing in NPAs".

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 Low yield on advances: Because of nonperforming assets
(NPAs), the yield on advances is lower than the actual rate on "regular
Advances." The reasons why yield is based on weekly average total
advances, including nonperforming assets (NPAs).

 Effect on Return on Assets: NPAs diminish the earning

capability of assets, which has an impact on ROA.

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