India’s Financial System Faces Crisis

The financial crisis in India has developed in recent years with the Nirav Modi and Vijay Mallya cases as examples. Whereby, large companies have defaulted on even larger debt, creating a ripple effect on the Indian economy as a whole. The health of commercial banks have a great impact on any economy and the failure of banks to adequately monitor and manage large commercial loans that have subsequently defaulted has led the government to take steps to prevent evasions such as these in the future.

So what is the problem? According to an article from the Economist, for decades, personal connections have provided a path for many Indian businesses. Many business owners are in industries that require a lot of interaction with the government. These business owners then call ministers to put in a word with any reluctant banker. The financing that is being provided by state-owned banks are often secured by cost estimates that are padded to obtain larger loans. Meaning that business owners could then secure assets without putting their own money in. If things went awry, the burden of these defaulted loans landed on the taxpayer through government bailouts. According to another article from the Economist, state-owned banks have failed to get a grip on $100 bn of dud loans.

So what is the solution? Unfortunately, the banking system and the government do not agree on the approaches to take in order to repair and rebuild the financial system in India, as scene in article from the Economist here. In fact, the deputy governor of the Reserve Bank of India (RBI) brought to light the feud the institution is having with the government on October 26, 2018. Specifically, the government has invoked a law dating back to 1934, which has never been used before, that allows it to issue directions to the governor. In addition, the government would like the RBI to cut interest rates and raise dividend rates that the bank pays to the government.

It’s not just the government and banking officials involved in the corruption that has led to this financial crisis. Simple audit procedures could have uncovered the impairment of so many assets. Which is what the National Financial Reporting Authority (NFRA), that was established on March 1, 2018, is tasked with. This agency will have authority to act against auditing firms who fail to identify large amounts of undervalued assets on a company’s balance sheet. Only time will tell if the RBI, the Indian government, and the NFRA will be able to join forces in order to save the financial system in India that will allow for the continued growth of the Indian economy.

Amy Hurd
Tulane University
Global Business Projects, India