Bad Loans being held by India’s largest state banks are something which has been caught in the headlines for several months now. The government-backed banking sector is estimated to have been entangled in so-called bad loans totaling over Rs.10.3 crore (up to $150 billion) since March of this year. In need of a solution, there is now the framework for a resolution in place which can ease the situation and put them back on the path to recovery.
More than 20 of the main Indian banks have now signed up to an inter-creditor agreement with more expected in the coming days. This pact is for a range of measures which effectively give more power to the main lender in seeking a resolution to their loans. When several lenders own a debt, they now need only 66% of agreement between themselves for action to be authorized. This will allow resolutions to be gained quicker as the industry tries to clean up the mess in which it has found itself embroiled.
What Exactly Happened?
Following a move by the central bank (RBI) to tighten lending controls in February, it emerged that 12.5% of loans had soured. This was at the same time as the nation’s biggest ever bank fraud was discovered, a seven-year plan which is estimated to have siphoned up to $3bn US dollars worth of money out of the country. All of this has left the majority of India’s financial institutions heavily exposed and in danger of ruin.
To compound their problems, many of the bad loans are believed to have arisen through negligence as well as some genuine business failures. What this has all resulted in is many good loans being compromised, casting doubt over the reliability of the Indian banking sector and the nation’s state-run banks in particular.
Crippling the Economy
The government’s internal finance minister, Piyush Goyal, has called on all banks to clean up their debts in-keeping with the ethics and meaning behind the current rules. With many of the countries larger banks coming under investigation of wrong-doings by government agencies, Goyal warned that it is imperative that the industries reputation remains untarnished as far as possible. With much of the population already alarmed by perceived irregularities, any further misstep by the leading lenders could considerably damage consumer confidence.
With all of the state run-run banks and most of the larger independent Indian banks expected to be united behind the inter-creditor agreement by the end of this month, it is hoped that normality can be quickly returned. What seems certain to happen as a result of this is a growth in the private banking sector. While the state-backed banks currently control around 70% of the banking assets of this country, the problems which have hit the public sector banks are likely to see them lose customers.
With increasingly more options for personal and business loans to be taken through private and foreign financial services, their market share is expected to double from 30% to 60% within the next 10 years. Having now recognized the problem and taken steps towards recovery, the public sector banking should remain strong although full recovery could still be several years away.
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