The deterioraiion in the overall asset quality ofbanks- gross Non-per-forming Aisets (NPAs) are reportedly 27% higher atthe eild of Decerilbet 2009 than at the end of December 2008- isnot surprising. Any slwdown in growth is bound.to trigger arise in NPAs as more and more companies default on loan repayments. The effect would be pronounced in when the slowdown coincides with a severe global recession. But for the restucturing of loans permitted by the Central Bank on fairly generous termsn NPAs would have been still higher. Prudent banks that took care while sanctioning lone-and then monitored the post- sanction disbursement diligently should be able to weather the crisis. But it is one thing to-have NPAs rise because ofa cyclical downturn, it is quite another to have NPAs rise because of policy errors that are entirely within the realm of Policy makers. And this is what we need to guard against. Excessiyely low interest rates skew the risk-reward equationby making projects that are actually not viable, appear viable-tll interest rates reverse and the same projects cease to be viable! it is now well established that tong periods of unduly low interest retes encourage banks to take more risks. A low interest rate regime driven by an easy money policy rather than macroeconomic fundementals leads to excessive expansion of credit. It incentivizes banks to take on more risk in search of higher returns and to misprice risk. The Central Bank always allows banks to restucture their loans in the event of rise in NPAs.