Broke Straits- Indian Banking Crisis
Updated: Apr 6, 2022
The Indian banking sector is facing a devastating crisis which is causing serious headaches. The sector has been pushed to the brink by the burden of bad loans and a liquidity crunch, which has hurt the credit and lending capabilities of banks and financial institutions alike to firms . The crisis has seen its effects reach the vast playing fields of the Indian economy too which is undergoing a slowed consumer demand.
The NPA (non-performing asset) crisis at the helm of the banking sector is causing serious headaches because the banking sector contributed to almost 90% of the economy commercial credit earlier. The massive exposurethat the NBFCs had to bad loans and NPAs hurt their balance sheets which resulted in a disruption of their lending capabilities and created a liquidity crunch.
The drama unfolded when the largest shadow bank IL&FS defaulted in payment obligations of bank loans (including interest),long-term and short-term deposits and failed to meet the commercial paper redemption obligations. That particular turn of events led to the unravelling of the complications present at the core of the bank which had exposure to some Rs 9100 Cr worth of bad loans. Due to the presence of the aformentioned complications in other such shadow banks the RBI implemented a slew of measures in efforts to prevent this from happening again. Despite all those safeguards taken now and then currently the fraud, involving the Punjab and Maharashtra Co-Operative Bank and HDIL, is rocking the sector.
The most affected in this soup are the investors who saw the values of their investments slump and the depositors (in case of traditional banks) who saw every last rupee they had deposited turn into somebody’s defaulted payment. In the case of the PMC Bank many saw their life savings vanish in a matter of seconds. Investors with holdings in companies like IL&FS, DHFL saw their investments slump to lows they had never dreamt of.
Quoting the Economic Times,” The four primary issues that the recent news around Indian banks bring to the fore are i) Poor decision making due to a lack of capacity to judge project quality ii) A structural asset-liability mismatch for the banks due to longer-dated assets and short-dated liabilities iii) A delay in recognising NPAs on the books iv) Outrigh t fraud and absence of fundamental corporate governance standard”.
This stressed state can only be blamed on the poor regulations imposed on shadow banks which gave them a free hand to do whatever they wanted without the fear of audits by the governments. They cooked up huge loans without putting much thought into the obligations that could arise in the future due to the libertyat hand. Currently they’re under pressure due to their huge loan exposure and liquidity crunch which has made raising urgent capital difficult.
Finance Minister Sitharam in efforts to provide some relief restructured the PSBs, wherein she merged the 10 state lenders into 4 mega banks. After the mergers are complete there will be 12 PSBs operational in the country. Boasting a stronger balance sheet and a larger footprint with more outlets across the country the move hopes to improve the dire state of the Indian economy. These PSBs with a stronger balance sheet are in the process of buying up some of these bad loans from private lenders. On the sidelines, the question arises “Till what extent will PSBs be able to fund this move?” which is quite crucial when undertsanding this move.in answer the PSBs have their own problems which require cash and thus their abilities to fund are poor leading to an inefficient move.
Finance Minister Sitharam in efforts to provide some relief restructured the PSBs, wherein she merged the 10 state lenders into 4 mega banks. After the mergers are complete there will be 12 PSBs operational in the country. Boasting a stronger balance sheet and a larger footprint with more outlets across the country the move hopes to improve the dire state of the Indian economy. These PSBs with a stronger balance sheet are in the process of buying up some of these bad loans from private lenders. On the sidelines, the question arises “Till what extent will PSBs be able to fund this move?” which is quite crucial when undertsanding this move.in answer the PSBs have their own problems which require cash and thus their abilities to fund are poor leading to an inefficient move.
RBI has also acted in the same footsteps as Sitharamn in the past following the wake of this crisis. RBI has over the past few months cut the repo rate many times with the latest being this Friday when it brought down the repo rate by 25 basis points. By doing this, the central bank has brought down the repo rate at 5.15 per cent, the lowest since March 2010.
This crisis has seen its effects reach the economies growth too with it being one of the key factors leading to the slowing growth of the Indian Economy. The crisis is seeing some resolve but a much more mature opinion about the future cannot be conceived now and is something that we will learn in due course of time