The Big Bad Banking problem: NPA

India wants to develop fast. We are the fastest growing major economy and we believe we can go even faster. However, slow credit growth is proving to be a big hurdle. Subramaniam Swami blames the RBI Governor Raghuram Rajan. He argues that RBI governor’s reluctance to slash the interest rates is hampering the credit growth. Mr Swami has even questioned Rajan’s patriotism to prove his point. In reply, Raghuram Rajan has said that slow credit growth is due to the NPAs (Non-Performing Assets) on the balance sheets of public sector banks.

What are NPAs?

Loans and advances are assets for the banks. They are considered performing if they generate income regularly in the form of interests, commissions, etc. When an asset stops generating income for the bank for a period of 90 days, it is termed as a non-performing asset or an NPA.

Negative Interest Rates

What is it? 

A monetary policy tool that sets the nominal target interest rate below the lower bound of zero percent. It effectively means that you pay the bank for storing your money.

Why is it done? 

During deflationary periods, consumption and investments fall. This reduces the aggregate demand and creates a negative pressure on the economy. This happens because people prefer to save and hoard money instead to spending and investing it.

Theoretically, a negative interest rate reduces the lending and borrowing rates and this increases the credit demand. Consumption and investment go up and aggregate demand increases.

Problem solved? Not quite.