India’s Bad Loan Conundrum: Recurrent Concern for Banking System Stability and the Way Forward

Banking and Finance Issues in Emerging Markets

ISBN: 978-1-78756-454-1, eISBN: 978-1-78756-453-4

ISSN: 1571-0386

Publication date: 4 October 2018

Abstract

In the economic literature, a crisis has been thematically defined around bank runs, failure of large financial corporations, and financial distress. Section 1 summarizes our learnings about international banking crisis, in terms of the origin and impact of such crises. This provides us an international benchmark before we delve deeper into India's banking distress, its size and trends. Section 2 focuses on the twin-balance-sheet crisis in India. On one side, corporate firms recklessly overleveraged, resulting in excess capacities and business diversification. On the other side, banks, both private and public, fell prey to excessive and procyclical credit lending and improper monitoring. Overall, too many projects were left too weakly monitored. Separately, we have focused on two subsections, first, how the financial institutions in India have overstretched their credit-disposal limit during market upturns. Second, we found absence of any theoretically grounded approaches to determine the capital-adequacy ratios (CARs) for the banks. In Section 3, we have identified the steps taken so far by the Banking regulator and the Government to resolve the crisis. Further, we critically examine the role of Korea Asset Management Corporation (KAMCO) towards a successful non-performing assets (NPAs) resolution in South Korea. Few key takeaways include, (1) establishing a public asset-management company (AMC) focused on maximization of recoveries and resolution of stressed assets, (2) well-defined governance structure for the AMC ensuring it works on market principles, shielded from political interferences, and (3) realistic asset valuation and transfer price that ensures limited downside risks for the public AMC.

Keywords

Acknowledgements

Acknowledgment

We would like to thank Professor T.N. Srinivasan, Yale University, for his excellent suggestions and comments on an earlier draft of our paper. We are also grateful to the internal reviewers at the Reserve Bank of India and an anonymous reviewer for their insightful comments. The views expressed in this chapter are those of the author(s) alone and do not represent the views of the organizations to which they belong.

Citation

Bhadury, S. and Pratap, B. (2018), "India’s Bad Loan Conundrum: Recurrent Concern for Banking System Stability and the Way Forward", Banking and Finance Issues in Emerging Markets (International Symposia in Economic Theory and Econometrics, Vol. 25), Emerald Publishing Limited, pp. 123-161. https://doi.org/10.1108/S1571-038620180000025007

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