Pandemonium: The Great Indian Banking Tragedy by Tamal Bandyopadhyay

PART I
THE CONUNDRUM

In October 2019, India’s Finance Minister Nirmala Sitharaman spoke
about the Indian economy at Columbia University. After she listed
the Narendra Modi government’s achievements, she took questions.
Somebody cited former Reserve Bank of India (RBI) governor
Raghuram Rajan’s comment that the first Modi government had not done
well because it was ‘extremely centralised’.
Sitharaman riposted that the government-owned banks had their worst
phase when Rajan was the RBI governor and Manmohan Singh the prime
minister.
‘What ails our banks today? Where has it been inherited from?’ she
asked.
Attempting to answer that question leads us into the first part of this
book. Multiple factors contributed to the piling up of the mountain of bad
loans. These negative factors were interwoven into the fabric of Indian
banking in such a way that it is hard to identify a single main culprit:
Was it the surge in bank credit during the golden growth era of 2006–
08?
Was it the 1990s decision to bury development finance institutions?
Was it the shallow corporate bond market?
Was it the RBI’s ultra-loose monetary policy after the 2008 financial
crisis?
Were banks to blame for being innovative in concealing non-performing
assets (NPAs) or bad loans?
Was it the so-called ‘policy paralysis’ in the latter stages of the United
Progressive Alliance (UPA) regime that ended in 2014?
Rajan went to war against the piling up of NPAs and his successor Urjit
Patel intensified the battle to recognise bad assets. But the contagion also
spread as the non-banking financial companies (NBFCs) were engulfed by
NPAs, after the 2016 demonetisation.
While the system was flush with money, the banks had turned cautious
because they were already burdened with NPAs. The NBFCs rushed to fill
the void but they committed the cardinal sin of borrowing short and lending
long.

Pandemonium: The Great Indian Banking Tragedy by Tamal Bandyopadhyay