FINANCE ACCOUNTING COACH | Free Online Accountant Reference Site » non-performing loans to total loans http://fmaccounting.com Covering Finance, Treasury, Accounting, Treasury, Taxation and Management Tue, 27 Jul 2010 01:54:33 +0000 en hourly 1 http://wordpress.org/?v=3.0.1 Asset Quality-Non Performing Loans To Total Loans http://fmaccounting.com/asset-quality-of-banks-and-financial-institutions-ratio-analysis-2/ http://fmaccounting.com/asset-quality-of-banks-and-financial-institutions-ratio-analysis-2/#comments Thu, 26 Apr 2007 05:27:31 +0000 slang http://fmaccounting.com/asset-quality-of-banks-and-financial-institutions-ratio-analysis-2/ 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 · [...]]]> To assess the Asset Quality of Banks/Financial Institutions, the following ratios need to be analyzed:

  1. Loans Loss
  2. NON-PERFORMING LOANS TO TOTAL LOANS
  3. Loans Recoveries Rate
  4. Loans Loss Reserve
  5. Earnings coverage
  6. 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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