an essay on “Banking crisis in India”.
Answers
Banking is a life line of economy . It's function of collecting and lending money looks more simple but banking functions are more beyond it. Banking provides credit to all sectors which acts as a catalyst for spurring the growth and economic activity . All in all it's cascading impact is huge on many prominent sectors , after all everything needs money.
In the history also Banking Sector has played a crucial role in building the developed economies and also failure of banking sector also caused the people to que up at banks to with draw the money as they presume bankruptcy of banks. Which clearly tells us that banks can make economy or break the economy. In this context India also understood the importance of banking sector resultantly nationalisation of banking done at early stage to make banking more inclusive, secure and safe . Though it played a key role in building the economy but it is not immune from bank frauds or crisis.
Bank Frauds or Bank crisis have been an integral part of Indian financial history . In 1913 John Maynard Keynes rightly mentioned after surveying the state of the banking in the country wrote in Indian currency and finance " In a country so dangerous for banking as India , It should be conducted on the safest possible principles " . His warnings have proven prophetic by looking at the recent bank frauds of Punjab National Bank , ICICI loan to Videocon and evasion of bank loans by fugitive economic offenders and followed by collapse of many banks in the past . These events questioned the credentials of banking sector. To whom one shall blame here either government or Regulatory authority or Bank ?
The following proverb sums up the subject matter - "Success has many fathers; failures none". Hence there has been the usual blame game. World Bank / IMF , In it's 2017 Financial Sector assessment programme of India has laments at several points that Reserve Bank's Of India regulatory powers over banks are not neutral to it's ownership .It is so true in the case of public sector banks as it's control lies in the hands of central government [ major stake holder]
All in all there is a operational failure on part of the banks , limited power of regulatory authority , autonomous power of central government and dual structure of regulation in case of public sector banks and state government's in case of co operative credit institutions. At present banking sector in crisis due to many challenges . Non performing assets issue looming and wilful evasion of loans on failure of business , conflict of interest while sanctioning of the loans. But the question prompts here , what is the root cause of these problems ? Major reasons are as follows .
1. Lack of accountability by employees and management.
2. Political interference is the major reason for crisis in the banking sector.
3. Auditor's oversight of looking at the fraud transactions.
4. Bank's reluctance to follow the guidelines for safe banking business.
Temptation to engage in fraud at the level of employee or employees is always present, in banks / in corporations , be it in public sector or private sector . But the question lies in case of banks what mechanism could induce discipline against frauds. There are three such powerful mechanisms.
1. Legal Deterrence
2. Market Discipline
3. Regulatory Discipline
To not to repeat the same situation in the future , It is fully transparent what needs to be done . Central government shall implement the four R's - Recognition, Recapitalisation , Reforms , Resolution to resolve the twin balance sheet problem and to revive the credit to all sectors of the economy and from RBI's point of view , legislative changes to the Banking Regulation act that make banking regulatory powers fully ownership neutral , not piecemeal but fully is a minimum requirement.
To conclude , future belongs to credit availability. If banking sector in crisis - credit demand from major sectors can not be fulfilled which elevates inflation and lowers growth momentum. So both government and central bank must implement all the necessary steps to regain creditability of banking and restore unflinching faith.
Explanation:
The Chinese and Indian economies have grown rapidly over the past decade. In China, this growth has been fueled by a dramatic expansion of credit, up from 140 percent of GDP in 2008 to 260 percent today. Credit has also expanded in India during the past decade, but it started from such a low base that private-sector debt is now only 86 percent of GDP – less than half the average of advanced economies.
Given this difference, you might expect Chinese banks to be struggling with bad debt while Indian banks enjoy the stability that comes with slow credit expansion. In fact, things are the other way around. Many commentators suspect that the official non-performing loan ratio of 1.7 percent understates the true extent of bad debt in China. A serious credit crisis may be looming in China.
9.6% — India’s official non-performing loan ratio
But a credit crisis has already emerged in India, where the official non-performing loan ratio is 9.6 percent and the ratio of “stressed assets,” which also includes restructured loans, is 14 percent. Even at the height of the global financial crisis, non-performing loan ratios in Greece, Portugal, and Italy did not reach this level.