Impact of Non-Performing Assets (NPAs) in Indian Banking Sector banking system. Higher NPA ratio shakes the confidence of investors, depositors, lenders etc. This also leads to poor recycling of funds, which will have a detrimental effect on credit deployment. Non-recovery of loans not only affects greater availability of credit but also the financial strength of banks. Say no to plagiarism. Get Custom Essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayProfitability: NPAs have a negative impact on profitability because banks stop earning revenue on the one hand and attract provisions higher than standard assets on the other hand. hand. On average, banks provide around 25-30% additional additional provisions, which has a direct impact on bank profitability. Contraction of Assets (Credit): Increase in NPAs puts pressure on fund recycling and reduces the ability of banks to lend more and hence results in lower interest income. This reduces the money supply, which can lead to an economic slowdown. Liability Management: In light of high NPAs, banks tend to lower interest rates on deposits and are likely to charge higher interest rates on advances to support NIM. This can become an obstacle to the smooth running of the financial intermediation process and hamper the activities of banks as well as economic growth. Capital adequacy: As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis. Each increase in the NPA level adds to the risk-weighted assets, providing justification for banks to further strengthen their capital base. Capital has a price ranging from 12 to 18% because it is a scarce resource. Shareholder Confidence: Normally, shareholders want to increase the value of their investments by increasing dividends and market capitalization, which is only possible when the bank makes significant profits through improvement in its operations. The increase in NPA level is likely to have a negative impact on banking operations as well as profitability, such that shareholders do not receive market returns on their capital and may sometimes erode the value of their investments. As per existing guidelines, banks with net NPA level of 5% and above must obtain prior permission from the RBI to declare dividends and also stipulate a dividend payout limit. Keep in mind: this is just a sample. Get a customized paper now from our expert writers.Get a Custom EssayPublic Confidence: The credibility of the banking system is also greatly affected due to higher level NPAs as it undermines the confidence of the general public in the soundness of the banking system . The increase in NPAs could pose liquidity problems, which could lead to a rush of depositors on banks. Thus, the increase in the incidence of NPAs not only affects the performance of banks but also the economy as a whole. In a nutshell, high incidence of NPAs has a cascading impact on all important financial ratios of banks i.e. Net Interest Margin, Return on Assets, Profitability, Dividend Payout, Coverage Ratio provisions, contraction of credit, etc.,.

Essay / Impact of Non-Performing Assets (NPAs) in Indian Banking Sector banking system. Higher NPA ratio shakes the confidence of investors, depositors, lenders etc. This also leads to poor recycling of funds, which will have a detrimental effect on credit deployment. Non-recovery of loans not only affects greater availability of credit but also the financial strength of banks. Say no to plagiarism. Get Custom Essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayProfitability: NPAs have a negative impact on profitability because banks stop earning revenue on the one hand and attract provisions higher than standard assets on the other hand. hand. On average, banks provide around 25-30% additional additional provisions, which has a direct impact on bank profitability. Contraction of Assets (Credit): Increase in NPAs puts pressure on fund recycling and reduces the ability of banks to lend more and hence results in lower interest income. This reduces the money supply, which can lead to an economic slowdown. Liability Management: In light of high NPAs, banks tend to lower interest rates on deposits and are likely to charge higher interest rates on advances to support NIM. This can become an obstacle to the smooth running of the financial intermediation process and hamper the activities of banks as well as economic growth. Capital adequacy: As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis. Each increase in the NPA level adds to the risk-weighted assets, providing justification for banks to further strengthen their capital base. Capital has a price ranging from 12 to 18% because it is a scarce resource. Shareholder Confidence: Normally, shareholders want to increase the value of their investments by increasing dividends and market capitalization, which is only possible when the bank makes significant profits through improvement in its operations. The increase in NPA level is likely to have a negative impact on banking operations as well as profitability, such that shareholders do not receive market returns on their capital and may sometimes erode the value of their investments. As per existing guidelines, banks with net NPA level of 5% and above must obtain prior permission from the RBI to declare dividends and also stipulate a dividend payout limit. Keep in mind: this is just a sample. Get a customized paper now from our expert writers.Get a Custom EssayPublic Confidence: The credibility of the banking system is also greatly affected due to higher level NPAs as it undermines the confidence of the general public in the soundness of the banking system . The increase in NPAs could pose liquidity problems, which could lead to a rush of depositors on banks. Thus, the increase in the incidence of NPAs not only affects the performance of banks but also the economy as a whole. In a nutshell, high incidence of NPAs has a cascading impact on all important financial ratios of banks i.e. Net Interest Margin, Return on Assets, Profitability, Dividend Payout, Coverage Ratio provisions, contraction of credit, etc.,.

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