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Difference between Gross NPA and Net NPA

In this article, we will discuss the difference between the Gross NPA and Net NPA. But before discussing the differences, we will first know about the Gross NPA and Net NPA.

What is Gross NPA?

Gross NPA stands for the Gross Non-Performing Assets. Gross NPA is the term used by commercial banks that refer to the sum of any unpaid debt, which is classified as non-performing loans. Commercial banks offer loans to their non-honored customers, and financial institutions are required to classify them as non-performing assets within ninety days because they do not receive the principal amount or net payments.

What is Net NPA?

Net NPA stands for Net Non-Performing Assets. Net NPA is a term used by commercial banks to indicate less allowance for poor and uncertain debts than the amount of non-performing loans. In order to cover unpaid debts, commercial banks tend to offer a precautionary amount. Thus, if one deducts the provision for unpaid loans from unpaid obligations, the resulting sum relates to the net non-performing assets.

Main Difference between the Gross NPA and Net NPA

The following are the various key differences between the Gross NPA and Net NPA:

  1. Gross NPA refers to the entire amount of debts that an organization has not collected or the individuals owing the organization has not fulfilled their contractual obligations to pay both the amount of principal and interest. On the other side, net non-performing loans is the amount resulting from the sum of the defaulted loans after deducting provision for uncertain and unpaid debts. It is the real loss that the organization incurs after defaulted loans.
  2. Credit institutions have a grace period during which an individual is expected to start paying for the loan and its related interests. When the term of the payout expires, the institution is obliged to write off debts that are not paid. Whereas, after ninety days, non-performing loans are classified as default and are accepted globally. Any payment due after the grace period of ninety days is categorized as a default.
  3. Gross NPA is the amount of all loans defaulted on by people who have received loans from the banking institution. It means that all the defaulted loans are added together to form gross NPA. The formula to calculate gross NPA is:
    Gross NPA = (A1 + A2 + A3 ……………………. + An)/Gross Advances
    Here A1 is the person who has taken the loans. On the other side, the net NPA is the sum that is realized after the amount of the provision has been deducted from the overall NPAs. The formula to calculate Net NPA is:
    Net NPA = (Total Gross NPA) - (Provision for Unpaid Debts)/Gross Advances
  4. Some major factors have been identified to be the significant causes of gross non-performing assets, including weak government policies, willful defaults, the unsuccessful recovery court, industrial disease, natural disasters, and many others. While net NPAs are the main products of gross non-performing assets. There is a major difference in the fact that the sum given by the financial institution to cover unpaid debts plays a crucial role in deciding the amount of net non-performing assets.
  5. Another difference between gross NPAs and net NPAs is what the corporation refers to as the company's actual loss. Gross NPAs do not constitute actual losses to the organization. On the other hand, Net NPAs reflect the company's real loss following the debt default. Since the financial institution has already issued unpaid loans, the given amount is deducted from the default amount resulting in the organization's actual loss.
  6. Some of the major causes of gross NPAs include a negative impact on the corporation's reputation and a negative impact on the enterprise's equity valuation. On the other hand, net NPAs have a major impact on the organization's profitability and liquidity. Low liquidity means that when they are due, the organization does not have sufficient cash to satisfy its commitments, which means that the organization may not afford to operate everyday operations.

Head to Head comparison between Gross NPA and Net NPA

Here, we are going to discuss the head to head comparison between the Gross NPA and Net NPA.

Features Gross NPA Net NPA
Meaning Gross NPA has an amount of defaulted loans. Net NPA has a default loans-provision for loans.
Actual Loan It is not the actual loan. It is the actual loan.
Causes It has various major causes, including industrial sickness, poor government policies, natural calamities, and many more. It also has various causes like low provision for unpaid Debt.
Default Period Its default period for the loan is Ninety days. It has an immediate default period for the loan.
Effects Some effects of Gross NPA are equity and company goodwill. Some effects of Net NPA are profitability and liquidity.

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