Non Performing Assets, as the term implies, do not generate any returns for the bank. In compliance with the Generally Accepted Accounting Practices and in accordance with the Basel norms there is a need for the Banks to classify NPAs into categories based on the migration of the assets from good to bad. The Non Performing Assets have to be brought under any one of the following categories.

A high level of non-performing assets may be a indicator of the manifestation of the credit risk. Though applicable to all banks, in general, this statement needs to review against the backdrop of the profile of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt. But they compensate this higher risk with higher than normal interest rates and processing fee, thereby increasing the bank spread. In the light of the above and to mitigate the credit and capital risks, there is an onus on the banks to set aside dedicated funds to cover up losses in the event of the assets turning bad. In banking terminology this is referred to as Provisioning. The extent of Provisioning is determined by the Provisioning Coverage Ratio [PCR] which in turn refers to that portion of the loans that should be set aside as contingency.

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