Business and Economics

India's banking crisis 11-10-18

Source - Economist, Nov 10, 2018: "India's shadow-banking crisis"     

India's state-run banks are sitting on about $100 billion in bad loans. India's shadow banks rely upon the state-run banks for loans. If the government fails to support the state-run banks, India could face a major financial crisis.  

India's financial sector: about half of all loans come from state-run banks. These banks face political pressures to buy government bonds, make credit readily available to rural borrowers (who are also voters) and make loans for government-approved infrastructure projects. These state-run banks are sitting on about $100 billion in bad loans. About one-fourth of all Indian loans come from "shadow banks" - these are institutions that make specialized loans (ex: housing sector) and are barred from taking deposits like a regular bank. Thus, they finance their consumer loans through borrowing from the state-run banks. Already, tightening credit in the state-run banks has caused the market value of the shadow banks to drop 40% this year alone. If there is a serious liquidity crisis caused by writing off the bad loans, the shadow banks are in deep trouble and 75% of India's loan could be in trouble. Note: 25% of all Indian loans are made by private banks which are generally well-run and in no danger.