November 16, 2014
Abstract: One key constraint to economic recovery is the banks’ capacity to lend to businesses. Holdings of non-performing assets (NPAs) of banks have been rising mainly due to their aggressive lending to infrastructure projects that are unlikely to become operational in the near future (due to multiple reasons like policy bottlenecks, delays in clearances, etc.). As a consequence, banks find it more attractive to lend to the government than to commercial borrowers.
In the short term, capital infusions into public-sector banks with an appropriate stipulation that the enhanced capital is used for increased lending activity can potentially stimulate growth. In the long term, NPAs need to be taken off banks’ books through some institutional arrangements.
Keywords: Credit; non-performing assets; private sector