Fresh accretion of NPAs during the year or a falling below the current position of standard assets of the bank is a slippage. Let us take an example that the gross NPA of a bank’s last financial year is 12% and in the current financial year it is 15% due to fresh accumulation of bad loans. We call it as slippage of 3% in the current year. A sharp rise in slippage has major impact on provisioning and net profit of the bank. Low slippage or no slippage in asset quality shows how asset qualities are managed by the bank. When asset quality goes up, benefits include more liquidity, greater risk capacity, and a lower cost of funds.
The slippage ratio is the rate at which good loans are turning bad; the credit cost is the amount a bank expects to lose due to credit risks. Slippage ratio of a bank is calculated as under;
Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100
Besides Bank Management and Banking regulator, rating agencies are keenly observing the slippage ratio to determine the rating of the bank.