CAPF AC 2020 Q64: Indian Economy – National Income & Economic Growth
Which of the following sectors contribute in recent years to the deterioration of asset quality of commercial banks by way of Non-Performing Assets ?
1. Agriculture and allied sector
2. Industrial sector
3. Infrastructure sector
4. Information technology sector
Select the correct answer using the code given below :
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 4 only
- (d) 1, 2, 3 and 4
Answer: (b) 2 and 3 only
Explanation
Where bank bad loans came from
How to think: bad loans pile up where the loans are very large.
Large loans go to factories and big projects, not to software firms.
A Non-Performing Asset (NPA) is a loan on which interest or principal is overdue for more than 90 days.
| Sector | Verdict | Reason |
|---|---|---|
| 1. Agriculture and allied sector | Not counted by the key | Loans are small and spread out |
| 2. Industrial sector | Major source | Stressed loans in steel, textiles, mining |
| 3. Infrastructure sector | Major source | Stalled power, road and telecom projects |
| 4. Information technology sector | Not a source | Firms carry little debt |
Terms linked to the problem:
| Term | Meaning |
|---|---|
| Twin balance sheet problem | Weak companies and weak banks at the same time |
| Insolvency and Bankruptcy Code | Law of 2016 to resolve bad loans |
| Asset Quality Review | RBI's check of bank books in 2015 |
Answer: (b) 2 and 3 only.
Why each option is right or wrong
- (a) Incorrect. This leaves out infrastructure, a leading source of bad loans.
- (b) CORRECT. Industry and infrastructure account for the bulk of the bad loans.
- (c) Incorrect. Information technology firms borrow little and are not a source.
- (d) Incorrect. This includes information technology, which has few bad loans.
Key point
NPA = loan overdue beyond 90 days. Main sources: large industrial and infrastructure loans (steel, power, telecom, roads). Remedy: Insolvency and Bankruptcy Code, 2016.
Remember
Bank bad loans: mainly industry and infrastructure.
Common mistakes
- Blaming farm loans for most bad loans; by value, corporate loans dominate.
- Including information technology, a sector with very little debt.
- Giving the NPA period as 180 days; it is 90 days.
Exam tip
Educated guess: any option with information technology is out. That leaves (a) and (b); big projects decide it.
Sources
- Reserve Bank of India — Financial Stability Report (sectoral asset quality)
- Economic Survey 2016-17 — The Twin Balance Sheet Problem