Slipage Ratio: Investors keep an eye on the quarterly results of banks because on the basis of this they take decisions regarding their investments. Usually, many investors see that the net profit of the bank has increased and interest income has also increased, but in spite of this some brokerage firms say that the result has not been very good. This happens because of the Slippage Ratio. Recently, Axis Bank had announced the June 2021 quarter results, according to which its profit on an annual basis had registered a jump of 94 percent and interest income by 11 percent. Despite this, according to some brokerage firms, the results were less than expected due to increased slippage. However, brokerage firms have given it a buy rating. Slippage ratio is the rate at which good loans are converted into bad. The rate at which a bank’s NPAs increase in a financial year is slippage. Apart from bank management and banking regulator, rating agencies also give importance to slippage ratio for rating the bank.
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Think of Slippage Ratio like this
Suppose the gross NPA of a bank was 12 percent in the last financial year and it increased to 15 percent in this financial year due to increase in bad loans, then it will be called a slippage of 3 percent. A sharp increase in slippage has a profound impact on provisioning and net profit.
Low slippage or no slippage in asset quality indicates how well the bank has managed the asset quality. When asset quality increases, so do benefits such as liquidity, risk appetite and lower cost of funds.
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This is how the assessment is done
- The slippage ratio is the rate at which a good loan goes bad. Good loan means that its installment is received on time but the bank has little or no expectation of income due to bad loan. In most cases, if a loan installment is not received within 90 days, banks classify it as a non-performing asset.
- The slippage ratio is calculated by multiplying the ratio of how much the NPAs grew in the current year to the standard assets at the beginning of the year.