India has done much to clean up its banks. But the collapse of a small lender seems like proof of systemic failings
Posted outsidedated September 23rd. A passage is highlighted in pink: withdrawals are to be limited to 1,000 rupees over six months. That fired the starting pistol for the bank run. Protesters showed up at the gates of the. The withdrawal limit was raised in response, first to 10,000 and then to 25,000 rupees. That was high enough to cover the balances of 73% of customers, but represents just 7.75% of the bank’s $1.7bn of deposits.
During the past six years the government has done much to clean up India’s banks. Bad loans have been identified and written off. The bosses of three of the four largest private banks have been pushed out because of lax lending practices. On paper, the bigger ones, at least, look in fine shape. The 18 banks classified as “public sector” look weaker, but in August the government said they would be consolidated into 12 in the hope of boosting their performance.’s collapse has investors on edge.
In the past the authorities have avoided forcing losses on account-holders after banks have failed, by arranging shotgun marriages with healthy institutions. That solved immediate problems but created moral hazard. Co-operative banks typically offer high interest rates in order to attract funds, but with no salutary past examples of losses, customers regard high rates as an opportunity, not a warning. According to Credit Suisse, just 30% of deposits across India’s banking system are insured.
This moral hazard is just one of the weaknesses of India’s financial architecture thrown into stark relief byshares with many lenders. As a bank it is supervised by the, but since it is a co-operative, the state where it is located shares responsibility. That split too often means lax oversight—and increases the possibility thatis not an outlier. India has around 1,500 co-operative banks, accounting for 8% of bank deposits and 11% of assets—a small but by no means insignificant share.
And then there are the non-bank financial companies . These make loans but do not have the same obligations as banks to tie up a hefty chunk of their capital with theand in “priority lending” . As a result, they have become essential to everything from auto to consumer to company finance. According to a study by
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