Banking Crisis in India Hits New Benchmark

There have been 16 banks failures due to Non Performing Loans (NPLs), which led to Indian Stock Market witnessing loss of $714 billion (Rs 1,00,000 crore) this week– a classic case of financial mismanagement leading to fiscal and then to economic rumblings down up to the top.

DESPARDES REPORT — The $6 trillion opportunity for global players in India’s consumer market could be a hot potato to deal with, if its banking crisis is taking into consideration– notwithstanding related fallouts.

According to reports, the number of non-performing assets (NPAs) of banks has sky-rocketed. At its peak, the gross NPA to advances ratio exceeded 11 per cent –considered a redline. Until the NPA crisis hit, banks contributed more than 90 per cent of Indian economy’s commercial credit. As a result, any impairment of banking has a deep and long-lasting impact on the economy.

The recent NPA crisis has been accompanied by a sharp decline in investment growth and a significant economic slowdown.

Government-owned banks, or public sector banks (PSBs), which account for 70 per cent of bank loans were hit worse and accounted for 90 per cent of the total NPAs.

Modi’s BJP-led government had to re-capitalize these banks. The total amount of capital infused by the government in PSBs since 2008–09 is Rs 3 trillion (US$42 billion) — 2 per cent of India’s GDP, and this is a serious fiscal drag.

The dismal state continues however. In five sessions till Tuesday, bank stocks lost up to 42 per cent of their market value and over Rs 1,00,000 crore ($714 billion) in market capital capitalization.

The Reserve Bank of India (RBI), as the official banking regulator, has pursued lighter supervision of the PSBs. This has further exacerbated the NPA crisis as the RBI allowed the banks to defer recognition of the bad news through various restructuring schemes.

The crisis of confidence among depositors has been triggered by the crisis in Punjab & Maharashtra Cooperative (PMC) Bank.

It all started with the RBI capping withdrawal limit at Rs 1,000 per customer for the Mumbai-based co-operative lender following detection of regulatory lapses.

According to a report, the Institute of Chartered Accountants of India (ICAI), the body that regulates chartered accountants, on Wednesday said it has initiated an investigation into the role of auditors in the PMC Bank crisis, and will take disciplinary action against its members if found to be involved in the controversy.

Proposed Financial Resolution and Deposit Insurance bill was withdrawn by Modi-led government, putting depositors and small lenders at huge risk.

There have been 16 banks failures due to Non Performing Loans (NPLs), which led to Indian Stock Market witnessing loss of $714 billion (Rs 1,00,000 crore) this week– a classic case of financial mismanagement leading to fiscal and then to economic rumblings down up to the top.

Leave a Reply

Your email address will not be published. Required fields are marked *