As a common misconception, we believe, taking loan for a property is sure to enable us buy a genuine property free of litigations as the bank would verify all the legal credentials of the property. We need to think again on that. Non-performing asset ratio for a bank shows those loans which are not giving returns to the bank. They comprise a variety of loans including housing loans. A better approach for selection of a bank for housing loan will be to select a bank which has a low Non-performing asset ratio. A comparison of banks in this regard is given below.
Non-performing asset ratio: The net NPA to loans (advances) ratio is used as a measure of the overall quality of the bank's loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3 months). Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. Higher ratio reflects rising bad quality of loans.
|Source Data: Equitymaster research|
The NPA ratio is one of the most important ratios in the banking sector. It helps identify the quality of assets that a bank possesses. If we look at the chart below, we can clearly see a differentiation between India's largest banks. A bank such as ICICI Bank would garner one of the highest NPA ratio amongst private banks on the back of its aggressive nature. As the banks lends out strongly to customers, the chances of them defaulting also rises. Plus, considering that private banks charge higher interest costs would only make things more difficult for its customers. At the same time, the NPA ratio of a relatively much conservative bank such as HDFC Bank would remain low. It is clearly evident from the above chart. The marginal spurt in this ratio during FY09 is due to its acquisition of Centurion Bank of Punjab.
Further, Axis Bank has done well in the recent past to bring down its NPA ratio. So is the case for Bank of Baroda (BoB). PNB has done well to keep its NPA levels low as well. As for India's largest bank SBI, its NPAs are relatively much higher than that of its PSU peers. This can also be attributed to its aggressive period over the past few years.