Abstract
Following the adoption of the New Economic Policy (NEP) by India in July 1991, Government of India (GoI) has started viewing banks as commercially organized profit-driven financial institutions whose viability depends upon their ability to make profit. Like all capitalist economies, India is also subject to trade cycles and onset of a recession leads to a drop in banks’ profit levels and an increase in their stock of non-performing assets. This prompts the government/central bank to take such measures as asking banks to tighten lending norms, raise capital adequacy ratio, etc. This chapter, on the basis of the models presented in Part I of the book, develops a simple baseline model to examine the implications of this kind of policies. It shows that the policies noted above deepens recession, increases inequality, and exacerbates the problem of non-performing assets and low profit. It also shows that, instead of taking the banks and the defaulting firms to task for a factor that is completely beyond their control, the best way of tackling this problem is to adopt appropriate stabilization programs to counter the recession.
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Ghosh, C., Ghosh, A.N. (2019). Macroeconomics of Non-performing Assets of Banks in India. In: Keynesian Macroeconomics Beyond the IS-LM Model. Springer, Singapore. https://doi.org/10.1007/978-981-13-7888-1_6
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DOI: https://doi.org/10.1007/978-981-13-7888-1_6
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