Non-Performing Assets (NPAs)

Choose the Correct Answer

Correct Answer : Option d

Explanation
Option (a) is correct: NPAs hurt the rate of profit of the Indian banks. NPAs negatively affect banks’ ability to generate income and profitability. As such, it is incumbent on banks to keep constant track of their NPAs to avoid adverse effects on their liquidity and capacity to grow. If the volume of NPAs continues to increase over some time, it can threaten the financial health of the bank.

Option (b) is correct: Higher NPAs influence the price of loans and interest rates, which in turn affects the confidence of investors, lenders, and depositors equally. While higher interest rates will directly impact the investors in need of loans for the creation of infrastructural and industrial projects, they also cause poor recovery of funds, which will affect the credit creation and revenue stream of the banks.

Option (c) is correct: The non-recovery of loans affects credit creation and further affects the financial soundness of an economy.

Option (d) is not correct: While NPAs affect bank profits (which may in turn reduce corporate tax payments), the impact on government tax revenue is indirect and minimal. It is not a primary or direct consequence of NPAs, unlike the others.