Gross NPAs of the banking system continues to rise and there were signs of stress in restructured portfolio of banks. The flow of assets to ARCs, however, lagged the pace of acceleration in growth of NPAs in the banks.
The increase in the level of NPAs has a number of negative consequences. From the banking system’s point of view, high loan loss provisions reduce net profit and put pressure on the lending rates. High lending rates discourage new and credit worthy borrowers from seeking loans from banks, with negative consequences for real economic activity. From a macroeconomic point of view, large stocks of NPAs dampen the effectiveness of monetary policy.