Question

Explain in details how non-performing loans affect banks. ?

pleae answer this within 45 min , thank you

Answer 1

Non performing loans are those loans for the bank which will reflect default on the part of the borrowers who have failed to made scheduled payments of interest and principal for a longer period of time and when these will be accounted for banking and commercial loan by International standard, the non performing loans are those loans if the borrower has not paid past 90 days.

Large number of non performing loans on the account of bank will be reflecting that bank will have an adverse impact on the overall performance because the Asset quality of bank is going to go lower due to non performing loans being a part of their portfolios.

The major source of income of these banks are issuance of the loans to the borrowers and charging the interest from them so when these borrowers are not able to repay the interest,then it will mean that they will have lesser money which are available on their books of accounts which are reflecting their Assets and they will be having a lower capability on the part of recreation of new loan and paying the operating cost.

when there would be a large number of non performing loans on the books of accounts of the bank, it will be reflecting a huge risk to the bank and investors who are invested into bank will always be looking for healthy books of accounts so, the stock price of these banks are going to go down because these investors will be dumping the shares of the bank due to increase in the non-performing loans and they are expecting that the profitability of these banks are going to decrease in the long run due to inability of earning higher income from the credit business.

So,itit can be summarised that those banks who have a higher amount of non performing assets will be having a higher risk associated with long term sustainability which will be accounted due to lower interest income and decrease in the overall market capitalisation due to decrease in this share price.