To assess the Asset Quality of Banks/Financial Institutions,the following ratios need to be analyzed:
- Loans Loss
- NON-PERFORMING LOANS TO TOTAL LOANS
- Loans Recoveries Rate
- Loans Loss Reserve
- Earnings coverage
- Capital Adequacy
- Capital Formation Ratio
- Capital to Assets Growth
- Gross Capital to Average Assets plus Reserves
NON-PERFORMING LOANS TO TOTAL LOANS
Ratio | Measure | Formula |
| Non Performing Loans To Total Loans | · helps determine the quantum of non-performing loans in the total loans portfolio.· It also gives an idea of the quality of the loan portfolio and an indication of possible loan losses in the future | Non Performing Loans ———————————-Total Loans |
Simple Illustration:
Details of ABC Bank:
Total Loans | $600 m |
| Non Performing Loans | $ 30m |
| Non Performing Loans to Total Loan Ratio | = 30/600= 5% |
The ratio is normally below 3%. It is important to use inter-bank/financial institutions comparison before proper conclusion is drawn.
More importantly,if we find this ratio is high next is that we should examine the reasons for such a large number of non-performing loans.
- Asset Quality-Loans Loss
- Asset Quality – Adequacy Of Loan Loss Reserves
- Asset Quality –Earnings Coverage
- Asset Quality Of Banks And Financial Institutions- Introduction
- What Is Meant by Asset-based Finance? What Are some of the differences between Asset-based finance and Cash Flow-based Loans/Finance
- Asset And Interest Cover
- Asian REIT’s Debts-To-Total Assets Ratio
FCCA,CA(MIA)with more than 26 years of post-qualifying working experiences. Previous working stints with one of the big accounting four,Regional GFC & Group Treasurer in a group of Malaysian and Group CFO in Singapore public listed concern.Also author to another very popular free educational accounting cum finance blog:http://basiccollegeaccounting.com under the branding of College Accounting Coach.
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