Question

Non-performing Assets (NPAs) are loans made by a bank or finance company on which repayments or interest payments are not being made on time. How do high NPAs affect the Banks in India?

1. Banks tend to lower the interest rates on deposits

2. Results in lesser interest income

3. Adds to risk-weighted assets

Select the correct code

1. 1 only
2. 2 and 3 only
3. 1 and 3 only
4. 1, 2 and 3 only

Answer 1

Correct Answer - Option 4 : 1, 2 and 3 only

The correct answer is 1, 2 and 3.

• In the light of high NPAs, Banks tend to lower the interest rates on deposits on one hand and likely to levy higher interest rates on advances. Hence, Statement 1 is correct.
• The increased NPAs put pressure on the recycling of funds and reduces the ability of banks for lending more and thus results in lesser interest income. Hence, Statement 2 is correct.
• As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis.
  • Every increase in NPA level adds to risk weighted assets which warrants the banks to shore up their capital base further. Hence, Statement 3 is correct.