Asset Quality-Non Performing Loans To Total Loans

Published by slang April 25th, 2007 in Banks/Finan.Institutions, Ratio Analysis

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
1. Capital Formation Ratio
2. Capital to Assets Growth
3. 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.

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