ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Engineering Banking Sector Recovery and Growth

The idea of “bail-in” in cases of serious banking instability has been widely discussed in India ever since the introduction of the Financial Resolution and Deposit Insurance Bill. Given the large non-performing loans of public sector banks, the Government of India and the Reserve Bank of India as the regulatory authority have to quickly act to ensure that public confidence in the soundness of commercial banks is not breached. In this context, three approaches are explored that could be adopted either individually or in a variety of combinations in different proportions essentially to secure banking stability. The bail-in idea should not be considered except in extreme conditions of large financial stress. The idea could be tried even before the extreme situation arises with provision of incentives.

The Banking Conundrum

Neo-liberal banking reform was launched in the early 1990s to address the low profitability of the public banking system and the large presence of non-performing assets. It set itself the objectives of cleaning out NPAs, recapitalising the banks and modifying banking practices to restore profitability and drastically reduce NPA volumes. This did initially have some effect. However, while the NPA ratio fell between the early 1990s and the mid-2000s, it has risen sharply since then. Moreover, while earlier priority and non-priority loans contributed equally to total NPAs, more recently, large non-priority loans to the corporate sector account for the bulk of NPAs. An analysis of these features reveals that these trends are indicative of the failure of neo-liberal banking reform in India.

‘Riskless Capitalism’ in India

A study of the financial processes underlying India’s high-growth trajectory of the 2000s and its relationship with “riskless capitalism,” a term first used by Raghuram Rajan in November 2014, finds that the Indian growth story cannot be over-simplistically explained as a result of “market-oriented” reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011–12 and bad loans piling up in the banking system.

Public Sector Bank Mergers

The slowdown in the economy and the resultant rise in bad loans have led to criticism of public sector banks and questioning of their raison d’être. While there is a rush to find a quick solution by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice.

Public Bank Privatisation in a Post-truth World

The Narendra Modi government appears to have decided to privatise public sector banks (PSBs). Preparations are underway with arguments being marshalled that “there is no alternative” to privatisation. Noises of this kind have emanated often from the Reserve Bank of India (RBI) and government...

Non-performing Assets in Indian Banks

Growing non-performing assets is a recurrent problem in the Indian banking sector. Over the past two decades, there have been two such episodes when the banking sector was severely impaired by balance sheet problems. A comparative analysis of two banking crisis episodes— one in the late 1990s, and another that started in the aftermath of the 2008 Global Financial Crisis and is yet to be resolved—is presented. Taking note of the macroeconomic and banking environment preceding these episodes, and the degree and nature of crises, policy responses undertaken are discussed. Policy lessons are explored with suggestions for measures to adapt to a future balance sheet-related crisis in the banking sector such that the impact on the real economy is minimal.

Concentration, Collusion and Corruption in India’s Banks

Why would companies, for whom costs rise with higher interest rates, choose to amass credit as interest rates rise? Were more and more loans taken with the understanding that default would be inevitable? Only a commission of inquiry with a specifi c mandate to understand the years of loose lending by banks in India can answer these and other uncomfortable questions. These answers are needed in the interest of securing our economy, and indeed our democracy.

Not in People's Interest

The politics and economics of interest rate formation in this country must be studied carefully. Lowering the interest rate raises stock prices in an environment where they themselves cannot move up thanks to the fundamentals of the economy that are not conducive.


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