How to improve banks profitability through the management of NPAs (non-performing assets)
Non-performing assets (NPAs) are among the leading causes of declining profitability in banks. You can improve a bank’s profitability through the management of NPAs. Effective management of NPAs is essential in keeping a bank or other lending institution operational. The management of existing NPAs can be difficult and may often lead to debt collection measures and legal action. That is why banks are better off mitigating their cumulative effects by using tools designed to prevent the future acquisition of more NPAs.
What is an NPA?
A non-performing asset is a loan or a borrower’s account that has been classified by a bank as a sub-standard asset. Or, an asset that has either been written off as a loss, or is likely to be.
Management of NPAs and bank profitability
NPAs are a challenge for all banks. They have an adverse effect on an institution’s credibility and credit rating. A priority for any bank should be to carefully manage non-performing assets to improve a bank’s profitability. While there is no immediate and final cure for NPAs and their effects, there are several ways of mitigating them. These could include:
- The proactive detection of potential loan defaults enables banks to monitor and recover loans more effectively.
- More effective tools for monitoring, follow-ups, and escalations of NPAs
- Through the monitoring and follow-up mentioned above, the curtailment of NPA, while simultaneously increasing the lending capacity and liquidity of the bank to offset the effects of troublesome assets.
These tools and solutions are mostly designed to provide predictive analysis so as to guard against future NPAs. By collecting and analyzing data from various sources, you can support lending decisions based on repayment capacity, and other factors. Accordingly, the management of NPAs relies heavily on technology. NPA Management requires advanced analytical tools.