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Rapid credit expansion, particularly since the last decade, was encouraged by improvement in asset quality, which, to some extent reflected the financial deepening process.
In the Indian context also empirical research suggests that asset quality is one of the main determining factors of credit, besides time deposits and lending interest rate (RBI, RCF, 2006-08).
With the initiation of the reform process in the early 1990s, there has been a paradigm shift in the credit allocation process from micromanagement to a greater role for market forces.
Section V delineates the micro level sources of NPAs at sectoral level.
The bank group-wise trends are set out in Section VI.
The banking sector in India has witnessed significant transformation over the last two decades in terms of type of borrowers/type of instruments and the credit pricing.
With enhanced freedom for business operations and increased presence of private/ foreign banks and non-bank credit institutions, the predominance of banking institutions in the credit market has increased and has become increasingly competitive.
Such crises tend to arise primarily from deteriorating economic fundamentals, notably declines in asset quality (Borio and Lowe, 2002).
The issue is of particular importance after the recent global financial crisis and the failure of some large institutions and bailouts that followed.
Empirical evidence indicates a relationship between bank failures and higher NPAs worldwide (Chijoriga, 2000 and Dash, , 2010).
The links between financial crises and bank funding may be strongest during banking crises.