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Banking crisis in India

Updated: Jan 7, 2021



On 12th March, Urja wrote a post about what went down at yes bank. The post talked about the rise and fall of one of the biggest names in India. Before Yes Bank, there was a similar debacle at Punjab and Maharashtra Co-Operative Bank where RBI put a limit on withdrawals sending people into a frenzy. After Yes Bank, Laxmi Villas Bank too suffered problems and RBI had to intervene to mitigate the situation.


The common problem that has been leading to the failure of these banks is bad loans. They lend to companies with big names which later default on such loans creating trouble for the banks and the depositors of these banks.


In the case of PMC Bank, the promoters of the real estate firm Housing Development and Infrastructure Ltd (HDIL), borrowed heftily from the bank and used the money to fund their lavish lifestyle. Besides them, property developers who allegedly over-borrowed; complicit senior bank management, and of course, politicians who wield considerable influence over co-operative banks helped make a bad situation worse.


At Yes Bank, The IL&FS crisis led to its largest borrowers like the Essel Group, Anil Ambani group and DHFL group becoming stressed and later defaulting. This happened because Yes Bank had a business model of making risky loans to companies with sub-standard balance sheets and without sufficient collateral leading to a huge risk build-up. For Laxmi Vilas Bank the defaulters were pharma major Ranbaxy and Fortis Healthcare.


Invariably, the customers end up paying the cost of institutional inefficiency. A classic example of this is the high cost of traditional customer acquisition being passed on to the customer as ‘processing fees’. It would be best that the customer stays informed and maintains a diverse portfolio to safeguard their own interests till the situation of the baking sector improves.


In the end, it comes down to finding a solution to the problems that confront the banking system. In India, most financial institutions have very primitive/ outdated risk models/ risk monitoring frameworks, and generally realize the stress in their portfolio well beyond the point that they can intervene and proactively manage risks. Perhaps the right investment in the right data, risk analytics models, and quality- supporting infrastructure that supports can serve as ‘early warning signals’ which can help to manage risks in time, rather than getting surprised by adverse events when it’s too late.

India needs a well-defined framework for resolving failed financial firms. Indian banking sector problems need to be tackled through substantive changes in governance and banking regulation. If not a crisis could soon be on our hands.



BY-

Mahek Chawla and Shreya

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