On Thursday (May 11), the British weekly newspaper The Economist praised the Modi government for reviving the banking sector in India and turning around its profitability.
In an article titled ‘India’s once-troubled banks are generating huge profits’, it said, “…Indian banks’ recent annual earnings have been spectacular…India’s state-owned banks generate, on average, over 11% and private banks almost 15%. In a development few, if any, predicted, Indian banks are among the world’s most profitable.”
The Economist noted that the bankruptcy reforms [pdf] introduced by the Narendra Modi government in 2016 helped in the rapid liquidation of failing companies and also forced ‘delinquent businesses to pay up.’
Only continued success will show that Indian finance has truly changed https://t.co/MDuw95BRCT
— The Economist (@TheEconomist) May 13, 2023
The British newspaper pointed out that the merger of 27 nationalised banks into just 12 and capital infusion in the struggling banking sector paved the way for their revival.
“In 2019, as part of the seemingly endless mop-up of Indira Gandhi’s banking nationalisation half a century ago, the government announced that 27 state-owned banks would become 12, with many branches closing,” it said.
“According to Boston Consulting Group, state banks have also written off $91bn in bad loans in the past five years—just a little less than their combined worth. Many survived thanks to an infusion of 2.6trn rupees ($31bn) from the state, in return for shares, over the past three years. Such infusions have more recently been curtailed, as banks have learned how to stand on their own feet,” the article added.
The Economist emphasised that these measures introduced by the Modi government helped in the overall acceleration of Indian economic growth. “As the system has become healthier, banks have lent more. Annual credit growth slowed to 3% in 2017. It is now up to 18%. Interest rates have risen less sharply than in America, helping limit stress,” it said.
Indian banks showed improvement even during Covid-19 pandemic: Report
The British weekly newspaper also hailed the system of ‘asset-quality review’, which was introduced by former RBI governor Raghuram Rajan in 2015. While it led to failures and write-downs initially, the review proved beneficial 5 years down the line.
The Economist pointed out that Indian banks showed early signs of improvement during the Covid-19 pandemic, despite mass lockdowns. It stated, “Non-performing loans peaked at 16% of corporate lending in 2018. They have since fallen sharply. By early 2024, predicts Crisil, a ratings agency, they should drop below 2%.”
The Economist slams UPA-era system of rolling over bad loans
The British weekly newspaper pointed out how the practice of ‘rolling over bad loans’ was rampant during the first half of the 2010s (aka the Congress-led UPA era).
“During the first half of the 2010s, Indian banks reported numbers that were strong—but unbelievably so. The practice of rolling over bad loans to avoid recognising losses was rampant, particularly with those made by state banks to borrowers with political connections,” it underlined.
The Economist stated, “Reality would have intruded eventually; an accelerant came in the form of scandals over the allocation of government licences in industries including coal, which concluded with the Supreme Court cancelling hundreds of mining permits in 2014, and telecoms, with the surprising exoneration of defendants in 2017. Approvals for projects froze, undermining their financial viability,” it observed.
