Non-Performing Assets
Essay by Asmaa Saad • September 26, 2018 • Course Note • 996 Words (4 Pages) • 1,091 Views
Credit risk
From this section, it is highlighted that there is the potential for loss due to the failure of counterparty to meet its obligation to pay the Bank in accordance with the agreed terms. Credit exposure many arise from both the banking side and the trading book. Then, this credit risk will be managed through a framework which sets out policies and procedures covering the measurement and management of the credit risk.
1. Non-performing assets
Non-performing assets (NPA) it is referring to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. Debt is classified as nonperforming when loan payments have not been made for a period of 90 days. While 90 days of non-payment is the standard period of time for debt to be categorized as nonperforming, the amount of elapsed time may be shorter or longer depending on the terms and conditions set forth in each loan.
Non-performing assets = non-performing assets / total loans
2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
5.88% | 5.70% | 5.77% | 5.52% | 5.85% | 5.81% |
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Based on the non-performing assets above, it showed that the highest ratio is on the year 2011 with 5.88% and the lowest was on the year of 2014 with ratio of 5.52%. This showed that the bank is still trying to improve its non-performing assets management and they need to take the initiative to reduce the non-performing assets in a time bound strategic approach. It is important as the gross non-performing assets reflect to the quality of the loan made by the bank while the net non-performing assets showed the actual burden of the bank.
2. Net charge off of loans
A net charge off (NCO) is the amount representing the difference between gross charge-offs and any subsequent recoveries of delinquent debt. Net charge offs refer to debt owed to a company that is unlikely to be recovered by that company. This bad debt often written off and classified as gross charge-offs. If at a later date, some money recovered on the debt, the amount is subtracted from the gross charge-offs to compute the net charge-off value.
Net charge-offs/ total loans
2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
0.39% | 0.60% | 2.72% | 2.61% | 2.49% | 2.55% |
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Regarding to the data above, it showed that the highest ratio is on the year 2013 with 2.72% while the lowest is on 2011 with 0.39%. The bad debt or the poor loans are regularly charged off as bad debt and purged from the books. If the the company find out it was wrong and part of the debt is actually repaid, then the net charged off can be calculated by finding the gross charge offs and the repaid debt. If the value of net charged off is negative , it is indicating that the recoveries is greater than charge offs during a particular accounting period.
3. Annual provisions for loan losses
Loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover a number of factors associated with potential loan losses including bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments. Loan loss provisions are an adjustment to loan loss reserves and also can be known as valuation allowances.
Annual provision for loan losses/ total loans
2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
0.3% | 0.5% | 0.9% | 1.2% | 2.4% | 1.4% |
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According to the data, the highest ratio is 2.4% in the year 2015, while the lowest is 0.3% in the year of 2011. Due to the higher amount of unable to repay the principal and interest on the loan facility due to the unfavourable economic condition has make the bank to put aside a large amount as a cushion to absorb expected loss on the bank’s portfolio in 2014 compared to the other years.
4. Allowance for loan losses
The allowance for loan and losses which formerly known as the reserve for bad debts, is calculated reserve that financial institutions establish in relation to the estimated credit risk within the institution’s assets. This credit risk represents the charge-offs that will most likely be realized against an institution’s operating income as of the financial statement end date. This reserve reduces the book value of the institution’s loans and leases to the amount that the institution reasonably expects to collect.
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