Non-Performing Assets: When and how did banks pile up such bad loans?

Non-Performing Assets: When and how did banks pile up such bad loans?

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1. The causes which led to NPA (non performing asset) and its present impact

Important facts

2.Impact of NPA

• Current account deficit widened by 2.4%.
• Rupee lost its value by 13% till now.

3.India’s position till 2008

• Increase in Capital flow in India from $17billion in 2003-04 to $107.9 billion in 2007-08.
• RBI intervened by purchasing dollar, which increased liquidity in Indian market, which was for favoring exporters.
• This led to high liquidity within Indian banks.

4.Trinity problem

• According to flemming model India was facing a trinity problem which holds that country cannot manage the three at the same time.
  • Monetary policy autonomy
  • A fixed exchange rate
  • Free capital movement
• One has to choose any two out of three available options.
• However a developing country like India wants capital for development, exchange rate that favors Exports and independent monetary policy to check inflation.

5.Lending by banks

• High liquidity in banking sector and expected bright prospects in future led banks to give unprecedented lending to investors during 2004 to 2008, which was 30% more in comparison to 2001

6.Global crisis and NPA

• Collapse of Lehman brother in US led to the global financial crisis in 2008 and slowdown of Indian economy
• This led to increase in NPA from 2.83 lakh crore in 2014 to around 12 lakh crore in 2018