Why India’s financial sector is in trouble | FT

Why India’s financial sector is in trouble | FT


Bank closures,
restricted lending, and collapsing institutions. India’s financial
sector is in trouble, and the contagion is starting
to bite in the real economy. So what is going wrong
at India’s lenders, and just how deep
do the problems go? India’s economy has long
depended on state-run banks, but poor governance
and cosy relationships with powerful tycoons helped to
contribute to a credit crunch, meaning borrowers had to
find new sources of money. So-called shadow
banks sprung up, but these less-regulated
lenders gave out yet more risky loans, especially
to the real estate sector. Last month, the
previously obscure Punjab and Maharashtra
Co-operative Bank was taken over by authorities,
its top executives arrested after they engaged
in heavy lending to a single property company. About 1.5m account holders
had access to their savings restricted. Panic ensued, with customers
demanding their money back. Rumours of further closures
spread like wildfire, and the country’s
central bank took to Twitter to
reassure the public. The run on PMC happened
almost exactly a year after the collapse of
IL&FS, a huge shadow lender. That was portrayed at the
time as a one-off event, but economic growth has since
slowed to a six-year low, and investors fear more
lenders will go bust. Loans are now much
harder to come by, businesses find
it hard to expand, and consumers are
struggling to get loans for houses or even motorcycles. Big shadow banks have seen
their share prices plummet, while traditional banks are
still struggling to recover a year’s worth of unpaid loans. If more lenders go bust, it
could create a domino effect and spread like a virus
through the wider economy. Economists say they see echoes
of the chain of events that led to the US financial crisis,
as once high-flying lenders succumbed to the
pressure of bad debt. And they’re worried
India’s economy could now face a reckoning of its own.

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About the Author: Oren Garnes

27 Comments

  1. Shadow banks are worse than mainstream banks…….these banks target desperate people and they use them to make profits…….by the way,they manipulate their bookings,it’s very hard to catch them……

  2. A systematic collapse which was predicted by Raghuram Rajan who insisted on high interest rates and curbing credit by instigating stricter controls and targeting inflation to which sadly no one listened at the time. It's just the beginning and sadly not the end.

  3. After India's independence, I wonder where they would be now if they decided to align themselves to the West and not the Soviets.

  4. Modi tried to destroy informal economy to incorporate it into formal economy so that he can show high growth. But it backfire very badly.

  5. India will be fine. The problem is not unique, solutions are widely available because of the failures and lessons learnt from banks in Europe and the USA.

  6. Lenders need to be measured on both the quantity and quality of their loan books. High growth usually means too much quantity and not enough quality.

    The nature of banking is such that when things are good they are very good but as soon as loans sour it becomes a crisis.

  7. the problem w/ Indian Financial sector is it's run by Indians, broadly speaking Indians r spiteful & dishonest, I deal w/ them on a daily basis for 3 decades, the common thing among Indians both Muslim & Hindu is they never want to make money if someone else makes money, every tenant I had has always tried to buy my properties, the tactics they use is to be a lousy tenant by paying rent late or not at all or sabotage the property hoping the landlord will sell cheaply

  8. started with a slight higher level of economt 70 years ago than China, the economy of democratic India is now less than 25% of chinese economy, maybe this is the reason India is always loved and praised by westerm medias, whereas China is always hated.

  9. Inflation is in all time low, salaries of middle class has gone up, income tax slashes have happened and still all Indians will blindly believe this man who speaks English. #colonialmindset

  10. The solution is to open the market to China so that Indian people can buy cheaper products, save money to pay back the loan.

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