How was banking and financial crisis managed in india?
Answers
India needs urgent reforms to its financial system because banks have created a major crisis by lending unwisely to big borrowers who lack the ability or intention to repay their debts.
The financial system in the economy is like the circulatory system in the human body. And banks form its beating heart. If banks falter, the flow of money stops and the economy suffers the equivalent of a heart attack.
In India, banks are not doing terribly well. They have lent unwisely. As a result, many loans have “become overdue” and a number of borrowers are not in a position to pay back their debt. This has made many a loan a non-performing asset (NPA). When borrowers are in default or in arrears on scheduled payments of principal or interest for specified period, usually 90 days, the loan is classified as NPA. All banks around the world have some NPAs but, if they become too large, banks can collapse. If the banks are big enough, this can cause the meltdown of the entire financial system.
According to CARE Ratings, India had the fifth highest NPA ratio in the world, ranking only after Greece, Italy, Portugal and Ireland. India’s NPA ratio stands at 9.85%, while major economies such as Britain, the US, Japan and Germany have ratios less than 2%. According to the latest Financial Stability Report of the Reserve Bank of India (RBI), the NPA ratio is set to deteriorate to 12.2% by March 2019, which would put India in fourth position, overtaking Ireland. As per the RBI, 11 public sector banks are under the prompt corrective action category, which means that the poor quality of balance sheets have to be addressed immediately to avoid potential meltdown.
India’s banking industry could be said to be in what economists call secular decline. This occurs when adverse long-term trends threaten an entire business model. This secular decline has led to much introspection within the government and its various regulatory bodies. The Financial Sector Legislative Reforms Commission (FSLRC) has proposed a new Indian Financial Code. This code would streamline India’s confusing regulatory framework and hold various actors in the financial system accountable. Currently, the country’s regulatory framework is a bit like the US with overlapping mandates and multiple regulatory power centers, but none of them having the power or the ability to oversee the financial sector effectively.
Consequently, astute observers like Chaitanya Kalbag of The Economic Times are rightly asking whether the “NPA black hole” could “suck in the country’s entire banking system.” A systemic collapse is certainly a possibility. Already, India’s weak banking sector has led to anemic credit supply. Most banks are not in a position to lend. Therefore, businesses cannot borrow money for capital expenditure or growth plans. In turn, this leads to lower employment and slower economic growth. Therefore, the economy is not exactly in rude health.
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