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The deterioration in the overall asset q...

The deterioration in the overall asset quality of banks- gross Non-per-forming Assets (NPAs) are reportedly 27% higher at the end of December 2009 than at the end of December 2008- is not surprising. Any slowdown in growth is bound.to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restructuring of loans permitted by the Central Bank on fairly generous terms NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because of a cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against. Excessively low interest rates skew the risk-reward equation by making projects that are actually not viable, appear viable-till interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest rates encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundamentals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk.
Higher NPAs in shortcomings in disbursement and follow-up of credit given by banks.

A

if the inforence is `definitely true,' i.e, it properlyfollows from.the statement of facts given.

B

If the inference is 'probably true' though not 'definitely true' in the light of the facts given.

C

If the 'data are inadequate, i.e., from the facts given you connot say whether the inference is likely to be true or false.

D

if the inference is 'probably false' though not 'definitely false' in the light of the facts given.

Text Solution

Verified by Experts

The correct Answer is:
a
From the given data in the passage, it is clear that the Inference is definitely true.
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The deterioraiion in the overall asset quality ofbanks- gross Non-per-forming Aisets (NPAs) are reportedly 27% higher at the eild of Decerilbet 2009 than at the end of December 2008- is not surprising. Any slwdown in growth is bound.to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restucturing of loans permitted by the Central Bank on fairly generous termsn NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because ofa cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against. Excessiyely low interest rates skew the risk-reward equation by making projects that are actually not viable, appear viable-tll interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest retes encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundementals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk. Low interest rate on credit reduces the capacity to absorb various unaccounted risk factors.

Tyndall effect is more pronounced in

Knowledge Check

  • The deterioration in the overall asset quality of banks- gross Non-per-forming assets (NPAs) are reportedly 27% higher at the end of December 2009 than at the end of December 2008- is not surprising. Any slowdown in growth is bound to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restructuring of loans permitted by the Central Bank on fairly generous terms NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because of cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against excessively low interest rates skew the risk-reward equation by making projects that are actually not viable, appear viable-tell interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest rates encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundamentals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk. Banks' NPAs occur only due to economic factors.

    A
    (a) if the inforence is `definitely true,' i.e, it properlyfollows from.the statement of facts given.
    B
    (b) If the inference is 'probably true' though not 'definitely true' in the light of the facts given.
    C
    (c) If the 'data are inadequate, i.e., from the facts given you connot say whether the inference is likely to be true or false.
    D
    (d) if the inference is 'probably false' though not 'definitely false' in the light of the facts given.

  • The deterioraiion in the overall asset quality ofbanks- gross Non-per-forming Aisets (NPAs) are reportedly 27% higher at the eild of Decerilbet 2009 than at the end of December 2008- is not surprising. Any slwdown in growth is bound.to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restucturing of loans permitted by the Central Bank on fairly generous termsn NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because ofa cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against. Excessiyely low interest rates skew the risk-reward equation by making projects that are actually not viable, appear viable-tll interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest retes encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundementals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk. The Central Bank always allows banks to restucture their loans in the event of rise in NPAs.

    A
    if the inforence is `definitely true,' i.e, it properlyfollows from.the statement of facts given.
    B
    If the inference is 'probably true' though not 'definitely true' in the light of the facts given.
    C
    If the 'data are inadequate, i.e., from the facts given you connot say whether the inference is likely to be true or false.
    D
    if the inference is 'probably false' though not 'definitely false' in the light of the facts given.

  • The deterioraiion in the overall asset quality ofbanks- gross Non-per-forming Aisets (NPAs) are reportedly 27% higher at the eild of Decerilbet 2009 than at the end of December 2008- is not surprising. Any slwdown in growth is bound.to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restucturing of loans permitted by the Central Bank on fairly generous termsn NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because ofa cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against. Excessiyely low interest rates skew the risk-reward equation by making projects that are actually not viable, appear viable-tll interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest retes encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundementals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk. Lower interest rate cycle projects commercially unviable projects as viable.

    A
    if the inforence is `definitely true,' i.e, it properlyfollows from.the statement of facts given.
    B
    If the inference is 'probably true' though not 'definitely true' in the light of the facts given.
    C
    If the 'data are inadequate, i.e., from the facts given you connot say whether the inference is likely to be true or false.
    D
    if the inference is 'probably false' though not 'definitely false' in the light of the facts given.

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