ON Financial Stability Report

Indian economy has withstood the global pressures with ease at a time when sluggishness was apparent in European and Japanese economic fronts. It is the sharp decline in oil prices coupled with declining energy prices which have made the conditions favourable and boosted dividend for India. All this was further enhanced by declining inflation, narrowing Current Account Deficit and also small subsidy bills. Despite these, the presence of the repelling issues cannot be ignored.

  • Banking sector has slowed down in terms of deposit mobilisation and credit provision. Latter is quite disturbing at a juncture when economy has started to show signs of recovery. Although other sources are trying to stem bank credit but the lack of organic credit growth is worrying as it acts as the core source of finance for production and trade activities.
  • Another notable issue is the massive rise in number of non-performing assets of banks. This has worst affected the public sector banks. This will further limit the banks’ ability to provide credit and will bite into the large share of already declining profits. The timing is bad as the banks are already struggling to increase the capital inflows to remain complaint to Basel-III norms. Further, as the linkages between large banks increases threat level due to contagion in event of stress.
  • The issue of double leveraging or borrowing by promoters to invest in equity of their operating business can spiral into huge leverage and increase the likelihood of defaults which when happen on a large scale can become haunting political problem.

Thus, India needs to act swift and smart and pull up its socks to gradually eliminate the sobering elements of the report. A fragile financial framework can be catastrophic as was seen in the 2008 crisis.