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How can bad loans for bank turn bad for you?


How can bad loans for bank turn bad for you
Loan book of a bank forms it asset base. And, the difference in the returns generated from such loans and interest provided by banks on deposits held, determines the bank's Net Interest Income or NII. It is on the basis which the net profit or profitability of a banking entity is ascertained. As per the PTI report on the study conducted by the Assocham (Associated Chambers of Commerce and Industry of India) banking sector in the country is under acute stress and its gross non-performing assets or NPAs or bad loans are estimated to reach 5% of the total loans by the end of the current fiscal.

Advances of the bank turn non-performing assets or bad loans when on it bank ceases to generate income. In many a cases, loans for a bank can turn non-performing or bad. Know about bad loans or NPAs in detail. And infact it is on the basis of which bad loans are classified as sub-standard assets, loss assets and doubtful assets.

So, coming to the point in question, as how loans that turn bad for banks (cease to generate returns and banks many a time have to write-off such loan accounts) prove bad for you.

With a majority of the middle-class population in the country in an attempt to realize extra cash to supplement their regular income and other HNIs putting their surplus funds into the stock market, hardly anybody is left unaffected by the happenings in a particular sector.

As negative outlook of any sector impacts the stock price of companies in the sector negatively, banking sector is no exception. And when advances extended by banks turn bad for banks, it reflects weak performance of the sector and correspondingly underlines its profits heading southwards. With it the overall market sentiment for the sector remains weak causing the stock price to move down. So, your chances of realizing higher returns any time soon get undermined. Also, when the banks themselves are not making profits, the probability of them resorting to dividend distribution to the shareholders (which they do from the accumulated profits) is lowered or completely negated. So, loans turning bad for banks indeed have negative repercussions on shareholders of companies in the sector.

Story first published: Thursday, January 23, 2014, 13:42 [IST]
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