January 2019

INDIAN BANKING: HOW BAD ASSETS WERE CREATED AND WHAT THE FUTURE HOLDS

Tamal Bandhopadhyay
Business Journalist and Author

The CEOs of India’s debt-laden state-owned banks probably celebrated Christmas ahead of its arrival in December – after an extremely stressful year, relentlessly chasing rogue corporate borrowers for recovery of the monies lent. Finance Minister Arun Jaitley played Santa Claus for them by seeking Parliament’s approval for Rs. 410 billion capital infusion in these banks.

 

The government had budgeted for Rs. 650 billion fund infusion during the current year, of which Rs. 420 billion is still to be allotted. This means, Rs. 830 billion will flow into the public sector banks (PSBs), taking the total sum to Rs. 1.06 trillion by March, 2019.

 

In October, 2017, the government had announced a staggering Rs. 2.11 trillion capital infusion in phases into PSBs that have little less than 70% share of the assets of the Indian banking industry. The new package, for which Parliament’s nod has been sought, is part of that.

 

Incidentally, between 1985-86 and 2016-17, in little over a decade, the government had injected Rs. 1.5 trillion into these banks; the bulk of this flowed in since the global financial crisis of 2008, triggered by the collapse of the iconic US investment bank Lehman Brothers Holding Inc.

 

To ward off the impact of the crisis, the Reserve Bank of India (RBI) flooded the banking system with money and brought down the policy rate to a historic low, less than the savings bank rate which was regulated then. With too much money, coupled with pressure from various quarters to lift consumption, banks lent recklessly and that led to the creation of bad assets.

 

IS THE SCENE GETTING BETTER?


In September, 2018, after the annual rit

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