India’s Banking crisis may take a toll on the country’s political economy


India’s ongoing banking crisis might just take a toll on the country’s political economy, leaving it damaged beyond repair. The core of this impending fiscal disaster is the cynical relationship between India’s rich political class and the government.

According to the Asia Times no amount of Hindu monetary chicanery will suffice, for it isn’t a liquidity problem. “Failed loans amounting to $100 billion cannot be excused. Throughout the previous decade, India ran double-digit levels of GDP with sizeable domestic capital inflows. Now, India’s state-run banking system is registering hundreds of billions of failed loans. The contagion is growing but the country’s dominant political class has calculated to pressure the central bank into conjuring money to paper over the debacle.”

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Recently, CARE Ratings ranked India 5th highest non-performing asset (NPA) ratio in the world, standing at 9.58 per cent, following closely behind Greece, Italy, Portugal and Ireland. According to the latest Financial Stability Report of the Reserve Bank of India (RBI), the NPA ratio is set to deteriorate to 12.2 per cent by March 2019, which would put India in fourth position.

RBI stated that 11 public sector banks are under the prompt corrective action category. This means that the poor quality of balance sheets needs immediate address to avoid a possible cataclysm. Economists say that India’s banking industry is in a ‘secular decline’. A secular decline occurs when adverse long-term trends act to threaten an entire business model. According to Fair Observer, the Financial Sector Legislative Reforms Commission (FSLRC) has proposed a new Indian Financial Code which would streamline India’s confusing regulatory framework. Politically, the state wants compliant banks but the RBI understands the absolute necessity of ethics about applying monetary policy.

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The banks present problem should be put back to time 2005 – 2012, when the state banks lowered lending standards and extended non-deposit-led credit to plutocrats throughout the upper chamber for infrastructure. As per the Asia Times they began to finance themselves by issuing unsecured debt because the government will not recapitalize ‘state-run zombie banks’.

RBI has taken note of this problem and has identified political and ethical nature of the crisis. But it will not able to do much with the impending Lok Sabha elections.