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Which of the following best explains why NPAs affect bank profitability?

medium Q5 of 15
Banking Awareness - Basics Of Banking & Banking Terminology
Which of the following best explains why NPAs affect bank profitability?
AThey stop interest income and require provisioning
BThey increase customer trust
CThey improve liquidity position
DThey increase lending capacity
Step-by-Step Solution

  1. Step 1: Identify income impact

    NPAs do not generate interest income.

  2. Step 2: Add provisioning effect

    Banks must set aside funds for bad loans.

  3. Final Answer:

    They stop interest income and require provisioning → Option A

  4. Quick Check:

    No income + provisions = lower profit ✅
Quick Trick: NPA = income loss + provision.
Common Mistakes:
  • Thinking NPAs help liquidity.
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