Modeling the NPA of a Midsized Indian Nationalized Bank as a Function of Advances

Abstract

Non-performing assets (NPA) occur in loans given by a bank or a financial institution where in the borrower defaults or delays interest and or principal payment. The management of NPAs therefore, is a very important part of credit management of banks and financial institutions in the Country. Currently NPA estimates in India are predominantly obtained from the figures published by the Reserve Bank of India (RBI). However it would be helpful for banks and financial institutions to have an estimate of the NPA as soon as loan amounts are disbursed. This study attempted to develop a predictive model for the NPA% at both the gross and net level from the advances made at a midsized Indian national bank. A strong correlation was observed between gross and net NPA% and the advances made suggesting that estimates of gross and net NPA can be made from advances. Linear and non linear models were fit to predict the NPA% from the amounts advanced. A non linear model linking both Gross and net NPA to advances provided the best curve fit and the least deviation from actual values. Thus by simply looking at advances an overall picture of the banks NPA level can be ascertained.

Keywords:, Advances, Gross NPA, Indian nationalized Bank, Linear Model, Net NPA, Non Linear Models, NPA Management.