To explain in simple terms, when a loan goes bad (either non-payment of interest or principal due), the loan account is declared as Gross NPA. For every Gross NPA declared, bank has to set aside some amount for the loss they might make on this loan. This is called Provisioning. RBI dictates the guidelines for how much a bank needs to set aside as provisions.
Let’s say a 1000 Cr loan is declared as Gross NPA and the bank set aside 300 Cr as provision for that bad loan. At the end of the year, bank tried to recover the amount and was able to recover only 500Cr. This means the bank has to take a loss of 500Cr. But it set aside only 300. The rest 200 Cr has to be deducted from PnL statement. This is called Net NPA.
So simply put, Net NPA = Gross NPA -(amount recovered) - Provisions
You have to see Net NPA of this year in comparison to Gross NPAs & Provisions of the previous year. Bank sets aside some amount as provision and after 1 year, any additional amount that needs to be write-off is called Net NPA.
In order to analyze a bank among other metrics, we need to look at
Gross NPA as % of total Advances: Lower is better
Provision Coverage Ratio (PCR): provisions made/ Gross NPA - Higher is better. Higher implies the bank has already taken worst into picture.
Net NPA as % of total Advances: Lower is better
For more in depth discussion on analyzing the banks, please check this thread