Non-Performing Assets (NPAs)
- NPAs are loans that cease to generate income for lenders due to borrowers’ failure to repay principal and interest within 90 days.
- There are different types of NPAs depending on how long they remain in the NPA category, including sub-standard assets, doubtful assets, and loss assets.
- Sub-standard Assets: Assets that have been classified as NPA for a period of 12 months or less.
- Doubtful Assets: Assets that have been NPA for more than 12 months.
- Loss Assets: These are loans where the bank or auditor has identified losses but the amount has not been written off wholly repaid.
BASEL Capital Adequacy Ratio
- Capital to Risk (Weighted) Assets Ratio (CRAR) indicates a bank’s ability to meet its obligations.
- The minimum ratio of CRAR is 8% under Basel II and 10.5% under Basel III.
- A high CAR indicates that a bank has a large enough financial cushion.
BASEL Tier 1 Capital
- Tier 1 and tier 2 capital are two types of assets banks hold.
- Tier 1 capital refers to a bank’s core capital, which includes equity capital and disclosed reserves.
- It is used to measure a bank’s capital adequacy and is the primary funding source of the bank.
- This capital can absorb losses immediately when they occur, allowing the bank to continue operating.
- Under Basel III, a bank’s Tier 1 capital must be at least 6% of its risk-weighted assets.