India's financial system is stuffed with bad debts and there is an undercurrent of fraud and bogus accounting
bank tweeting that, yes, there are rumours of “certain” banks facing deposit runs but “there is no need to panic”. Would you feel reassured? That is the unenviable position Indians found themselves in last week as a financial storm rumbled on in the world’s fifth-biggest economy with no sign of the authorities getting a firm grip. In the latest fiasco a co-operative bank,, is accused of fraud, prompting depositors to yank their cash out.
The origins of this mess go back to 2005. In the first phase conventional banks, which control about four-fifths of the system’s assets and are mostly state-run, lent too freely to infrastructure and industrial projects, sometimes ones backed by well-connected tycoons. The plight today is a continuation of the second phase: a boom-and-bust in lightly regulated shadow banks, which control the remaining fifth of the system.
should do another “stress test” of the banks, and test the shadow banks, too. The results should be made public. If state banks need capital they should get it. Some shadow banks will fail and should be wound up. The approach taken withoffers a template. It was put into a form of administration and creditors face a big haircut . In the longer run, India should privatise its state banks so that they can escape control by politicians.
This ought to be India’s moment. It has a big domestic economy and lots of entrepreneurs, oil prices are fairly low—helpful for a big importer—and multinationals are keen to shift their factories out of China. Cleaning up the financial system is a gigantic task. But until it is done India will not thrive."A big stink on the brink"
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