Why a World Bank Loan for India's Banks?

From the perspective of public policy, finance is arguably the most important sector in the economy for the role it plays in providing funds to maintain the flow of production. Finance is also the most fragile sector. This fragility has been in abundant evidence in the past couple of years. One would think that national authorities would therefore now be extra careful about what kind of policies they would pursue and who they would seek help from for the financial sector. Not so the government of India, which is currently in the midst of negotiating a $2.5-$3 billion loan from the World Bank to recapitalise the public sector banks (PSBs).

When presenting the budget for 2009-10, Union Finance Minister Pranab Mukherjee went out of his way to highlight the virtues of bank nationalisation four decades ago and the strength the economy derived from possessing a strong public sector in banking. Indeed, a revelation to the world economy has been the strength of Indian banking. The PSBs, in particular, have been more or less untouched by the global financial crisis. It must therefore be very unusual that the government is now looking for external help to augment their capital.