{"id":44212,"date":"2019-03-14T12:32:07","date_gmt":"2019-03-14T12:32:07","guid":{"rendered":"https:\/\/thepubliceconomist.com\/?p=44212"},"modified":"2019-03-14T15:35:58","modified_gmt":"2019-03-14T15:35:58","slug":"banking-crisis-and-trilateral-tussle-between-rbi-government-and-nbfcs","status":"publish","type":"post","link":"https:\/\/thepubliceconomist.com\/?p=44212","title":{"rendered":"Banking Crisis and Trilateral tussle between RBI, Government and NBFCs"},"content":{"rendered":"\n
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Kshitij Bansal and Ajinkya Salunkhe
Indian Institute of Foreign Trade<\/figcaption><\/figure><\/div>\n\n\n\n

The major catalyst for\nany country\u2019s economy is the banking sector. It is the major source of\nfinancial resources for capital-intensive sectors such as infrastructure,\nautomobiles, iron and steel, industrials and high-growth sectors such as\npharmaceuticals, healthcare and consumer discretionary. In emerging economies\nlike India its role grows multi-fold. Apart from acting as agents of financial\nintermediation banks also have an additional responsibility of realising the\ngovernments social reform agenda. Because of this close relationship between\nbanking and economic development, the growth of the overall economy is\nintrinsically correlated to the health of the banking industry.<\/p>\n\n\n\n

What\nled to the Banking Crisis?<\/strong><\/p>\n\n\n\n

Indian economy was going through a dream run in terms of growth from 2002 to 2008 which led to spiralling of credit growth in the Indian banking sector in excess of 22%. But as the financial crisis struck a slowdown in economic growth started which further resulted in lower credit<\/g> demand as well as a receding appetite on the part of the banking industry, to extend credit. This further led to ballooning<\/g> of stressed assets from a mere 5.7% in FY08 to 10.2% in FY13.<\/p>\n\n\n\n

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At this point of time an\niceberg was created that kept on pilling up every year owing to the inefficiency\nof existing frameworks to restructure bad loans. Some of these frameworks were\nCorporate Debt Restructuring, Sustainable Structuring of Stressed Assets or\nS4A, Strategic Debt Restructuring, and Flexible Structuring of Existing Long-Term\nProject Loans. A need was felt by the RBI for having proper bankruptcy laws\nsince most of the wilful defaulters were able to find loopholes in the existing\nschemes which further aggravated the situation for the banks to recover loans. In\norder to resolve this government first initiated a Banks Board Bureau (BBB)\nunder the leadership of former CAG, Vinod Rai and then brought into effect\nInsolvency Bankruptcy Code (IBC) in 2016 which further led to scrapping schemes\nlike CDR, SDR, S4A, JLF altogether.\nDuring this time the major industries which contributed to stressed assets were\ninfrastructure, metals and the textiles which also got reflected in some of the\nmajor companies whose large NPA accounts went for resolution to National\nCompany Law Tribunal (NCLT). Some of these companies included Lanco Infra, Bhushan\nPower & Steel, Electro Steel, Essar Steel & Alok Industries. When the\nthings were looking to improve considerably another setback struck the banking\nsector due to PNB fraud and a slowdown in global economy due to trade war which\nfurther dragged the NPA recognition process and also led to creation of new\nNPA\u2019s.<\/p>\n\n\n\n

Opinion on Banking Crisis:<\/strong><\/p>\n\n\n\n

NPA situation has definitely improved in comparison to the situation in 2016 or 2017 majorly owing to the scrapping of restructuring schemes and making accelerated recognition of a number of large stressed accounts as NPAs. Another reason for the improvement in Gross NPA ratios is the capital infusion into state-owned banks under the restructuring scheme which has further led to increase<\/g><\/g> in the credit growth. Although the situation has improved the current NPA situation has turned into a crisis which can be mitigated but cannot be eliminated. Considering the government has set a target of turning India into a $10 trillion economy by 2030 would require strong credit growth by the banks and amidst global headwinds and macro shocks this will certainly keep the iceberg floating around.<\/p>\n\n\n\n

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Suggestions to improve the NPA situation:<\/strong><\/p>\n\n\n\n