Why are NPAs so widely tracked?
Because if a sizeable percentage of the loan book of a Bank becomes NPA, the equity portion gets hit of the Bank (because remember deposits have to be returned with interest and some money is in CRR/SLR, so the direct hit is to equity).
Because if a sizeable percentage of the loan book of a Bank becomes NPA, the equity portion gets hit of the Bank (because remember deposits have to be returned with interest and some money is in CRR/SLR, so the direct hit is to equity).
Due to big sized NPAs, equity value can get hit, and if equity value gets hit, the stock price can get hit badly and also limits the growth of the bank.
Example – Bank has Rs. 80 of deposits, Rs. 20 of equity. Its loan book is Rs. 80 (suppose) and if 10% becomes NPA, out of 80, so that translates into Rs. 8 NPA. Since the bank has to pay back deposits with interest, the banks’ equity value gets hit.
