Moreover, these problems prey on the weak banks, which are vulnerable and have relatively small amounts of capital to absorb unanticipated losses.
NPAs generate a vicious cycle of effects on the sustainability and growth of the banking system, and if not managed properly could lead to bank failures.
Anemic external macroeconomic situation post-crisis, high inflation and dwindling asset prices have eroded the debt servicing capacity of borrowers and contributed to the asset quality problems.
Sectoral analysis demonstrates rising incidence of loan defaults in infrastructure, particularly power, retail, SSIs and agriculture, across bank groups.
In the Indian context also empirical research suggests that asset quality is one of the main determining factors of credit, besides time deposits and lending interest rate (RBI, RCF, 2006-08).
With the initiation of the reform process in the early 1990s, there has been a paradigm shift in the credit allocation process from micromanagement to a greater role for market forces.
A brief recap of data and methodology used in this study is outlined in Section III.
Section IV examines the trends in gross advances and NPAs at the aggregate level and also undertakes an empirical analysis to understand the macro-financial linkages underlying the asset quality phenomenon.
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.