How to Calculate Non Performing Assets

Calculating non-performing assets is a sound financial practice.

A non-performing asset is a common line item on the balance sheet of most financial institutions. To the bank or financial institution carrying the asset, it represents a debt obligation where the agreed upon interest is no longer being paid by the borrowers for a long period of time. An example of a performing asset is a mortgage that is paid up to date. An example of non-performing asset is a mortgage that is in foreclosure.

Instructions

1. Determine the policy for deciding if a loan is "non-performing" (NPA). For some institutions "non-performing" is classified as 60 days whereas others classify it as more than 180 days.

2. Identify all interest bearing loans for the bank. Divide the loans into segments that match your policy thresholds. That is, if an asset qualifies as NPA after 60 days you may want to segment NPAs into those that are 30 days past due, 60 days past due and 90 days past due.

3. Identify accounts receivable (accounts paid on credit). Split these up into the same 30-, 60-, and 90-day segments established for loans.

4. Add all accounts that fall into your definition of past due. For instance, let's say the threshold for a non-performing asset is 60 days and there are two loans worth $500,000 each that are past due in this category. The value of non-performing loans is $1 million even though the interest income loss may only be 10 percent of this amount.

References

• Investopedia: Nonperforming Asset