Gross NPA vs Net NPA

Parameters Determining the Key Difference Between Net NPA vs Gross NPA

Gross NPA

Net NPA

Meaning and Definitions

Gross NPA is the amount of the debts an establishment or people owe to the organization that has failed to collect or honour their contractual obligations

Net NPA is the amount that results upon deducting provision for any unpaid or doubtful debt from the loan’s sum.

How to Calculate the Amount

These loans are the total sum of loans defaulted by individuals who acquired loans from a financial institution.

Gross NPA = (A₁ + A₂ + …. + A_n) divided by Gross Advances

Here, A₁ refers to the loans given to the first individual (A₁)

These are the amount identified after the provision amount gets deducted from a gross NPA.

Net NPA = (the Total Gross NPA) minus (Provision for the Unpaid Debts)divided by the Gross Advances

Default Period

Financial institutions provide the borrowers with a grace period after which the individual needs to begin the payment of the loan alongside its interest. But in case of the expiry of the payment duration, the credit institution will be obligated to present a written for debts that aren’t yet paid.

Contrarily, the net non-performing asset doesn’t have any grace period. It is calculated instantly.

Causes

Causes of gross non-performing assets are industrial sickness, poor government policies, willful defaults, ineffective recovery tribunals, and natural calamities.

Note that net NPA is the principal product of gross NPA

Actual Loss

Net NPAs are the principal products of any gross non-performing asset.

Net NPA comprises the actual loss that an organization experiences after the debt has defaulted. Note that the credit institution offers unpaid loans. So, the amount is deducted from the default amount that leads to the actual loss any organization faces.

Effects

A company having bad equity value may face difficulties in attracting investors because of low ROI and the company’s low share value

Net NPAs impacts greatly on liquidity and profitability of an establishment. Here, low liquidity indicates that the company is unable to perform the tasks due to low cash. So, this means that the company cannot afford to operate its regular activities.