7. Non-performing Assets

Recent rising trend of non-performing assets (NPAs) has become a major concern for banks and RBI both because of its inherent risk of weakening financial system. Effective management of NPAs is essential for preserving the economic value of banks and economic stability. Along with sliding domestic growth during 2009–2012, the banking sector also witnessed a slowdown in its overall performance associated with rising NPAs. Whether or not slowdown in economic growth was associated with higher level of NPAs of banks? Were NPAs result of asymmetric information problem of banks? Empirical analysis showed that there was a statistically significant negative correlation between NPAs and real GDP growth rate for each bank group. This supports the hypothesis that higher NPAs of banks were due to slowdown in real domestic economic growth. However, there may be macroeconomic shocks or asymmetric information problem of the banks that affects the level of NPAs in some cases.