Question

1. China has over $1 trillion dollars in ‘non-performing loans’. Define ‘non-performing

loans’ and tell how they are handled in the USA.

2. Again, you have read about China’s non-performing loans. What other 3 factors would you look at to validate (confirm) the idea that that the currency will soon be devalued.

3. The interest rate now used globally as the basis for loans has an acronym called ____________ . What does this acronym stand for? ___________________________________________

Answer 1

1. Non performing loans are those loans in which the borrower has defaulted and hasn't paid the principal or interest for some time. Commercial loans are considered as NPAs if the borrower is 90 days past due. The banks can take possession of the assets pledged as collateral for the loan. Banks can foreclose on homes for mortgage loans. Banks also try to sell the risky assets to collection agencies at discounts to take it off their balance sheet. Historically there have been huge bailouts and stimulus packages by the government to help the economy recover when the magnitude of non performing loans is huge enough to impact the economy. Example - 2008 crisis. The government may raise the Federal funds rate to control the money supply and make loans costlier. This impacts the rate of borrowing and NPAs.

2. Apart from NPAs, the other reasons for China's currency devaluation are slowing growth, fall in exports, China's expectation that Yuan will be a global reserve currency a status enjoyed by other reserve currencies such as dollar, euro and yen.

3. LIBOR or London inter bank offer rate is used as a reference rate globally.