Banking Crisis In India

The Indian banking sector had started buzzing much before the pandemic, with rising Non-Performing Assets, failures of commercial banks, failures of non-banks and housing finance companies, frauds, and mergers of public sector banks. The Chinese and Indian economies have grown rapidly over the past decade. In China, this growth has been fueled by a dramatic expansion of credit, up from 140 percent of GDP in 2008 to 260 percent today. Credit has also expanded in India during the past decade, but it started from such a low base that private-sector debt is now only 86 percent of GDP – less than half the average of advanced economies. The amount of non-performing assets (NPAs) in India’s banking sector has skyrocketed in the last five years.

It has been accompanied by a sharp decline in investment growth and a significant economic slowdown. In this post, Rajeswari Sengupta and Harsh Vardhan discuss the deep structural problems with government-owned banks that culminated in the ongoing NPA crisis, and steps to resolve them. India’s banking sector has been going through a rough patch for the last five years. The number of non-performing assets (NPAs) has skyrocketed. At its peak, the gross NPA to advances ratio exceeded 11%. Until the NPA crisis hit, banks contributed more than 90% of the economy’s commercial credit. As a result, any impairment of banking has a deep and long-lasting impact on the economy. The recent NPA crisis has been accompanied by a sharp decline in investment growth and a significant economic slowdown. The government had to recapitalize the banks.