Gross NPA: It is the total number of NPAs of the bank simply added. Banks would continuously assess this by evaluating their loan payments and decide the NPAs. What you need to understand here is when the NPA occurs , it is not just an interest income loss to the bank, but a principal loss as well. That means, if a bank has lent 100 Crore to a company with an outstanding loan amount of 60 Crores,then the bank would lose these 60 Crores along with the future interest payments as well- when the company goes bust. Now this is a serious loss to the bank and someone has to bear that loss. If the loss is much higher and there is every possibility that the customer's deposits may get eroded. This is where the risk management and regulators come into picture. Knowing that the banks would take extra risk in giving the loans, the regulators decided to put a condition known as provision for bad assets. To elaborate, banks need to continuosly assess their loans and set aside an amount in the beginning itself to accommodate for any losses. It means that for a total loan base of say 500 Crores, depending on the interest payments nature, banks are required to keep a provision aside, let us say 50 Crores. In simple terms, it means that the bank has alrady kept aside 50 Crores for bad assets and has the money to bear that loss.
Net NPA: Net NPA is simply the total bad assets (actual) minus the provision left aside. Let us study a few examples.
Scenario 1 :Gross NPA : 100 Crores ; Provision Aside : 10 Crores ; At the end of the year, the bank manages to collect 85 Crores only.
Now actual NPA is 15 Crores - Provision is 10 Crores = Net NPA = 5 Crores
Scenario 2: If the bank manages to collect 95 Crores. Then Net NPA = 5-10 = -5 Crores.
Generic Conclusions: In an ideal and healthy scenario, the Net NPA mean of the all the banks should be close to zero. If an individual bank has Net NPA in negative, then that is a good sign. In practise you would see the Net NPA or Gross NPA as a percentage. Usually it is calculated on the total lending done for that year.
