Essay On Growth Of Banking Sector In 2012

Besides asset quality, NPAs epitomize the credit risk management and efficacy in the allocation of resources.

There is a near unanimity in the literature that asset quality is a critical determinant of sound functioning of the banking system.

Going forward, asset quality could come under greater strains, given the weakening economic backdrop and global headwinds, impinging on the soundness of banks and macro financial stability.

E230, E3, G21 Key words: GDP, business cycles, prices, credit, assets Preface The Indian banking sector accounts for a major portion of financial intermediation and is considered to be the main channel of monetary policy transmission, credit delivery and payment systems.

In the period immediately following the global financial crisis, when asset quality of banks in most advanced and emerging economies was impaired, the asset quality of Indian banks was largely maintained (RBI, AR, 2011-12).

Sectoral analysis demonstrates rising incidence of loan defaults in infrastructure, particularly power, retail, SSIs and agriculture, across bank groups.

The contagious nature of loan losses emanates from the fact that their downside impact can quickly transmit to earnings, capital, and liquidity.

They are insidious in the sense that it is often difficult to know that there is a problem until it’s too late.

This paper explores the macro-financial linkages and micro-level sources underlying the asset quality deterioration.

In line with the ongoing international intellectual discourse, this paper finds the evidence of procyclicality in the Indian context as reflected in past credit boom-bust episodes as well as economic and interest rate cycles.

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