Possible reasons for NPAs
- Diversification of funds to unrelated business/fraud. Lapses due to diligence. Busines losses due to changes in business/regulatory environment. Lack of morale, particularly after government schemes which had written off loans. Global, regional or national financial crisis which results in erosion of margins and profits of companies, therefore, stressing their balance sheet which finally results into non-servicing of interest and loan payments. (For example, the 2008 global financial crisis).
- The general slowdown of entire economy for example after 2011 there was a slowdown in the Indian economy which resulted in the faster growth of NPAs.
- The slowdown in a specific industrial segment, therefore, companies in that area bear the heat and some may become NPAs. Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates, therefore, resulting in NPAs.
Impact of NPAs
- Lenders suffer a lowering of profit margins. Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy. Higher interest rates by the banks to maintain the profit margin. Redirecting funds from the good projects to the bad ones.
- As investments got stuck, it may result in it may result in unemployment. In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend.
- Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost. Investors do not get rightful returns. Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
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