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Abstract
Indian banking has undergone structural changes from financial reform and the process of deregulation during the 1990s. Added to this is a new element, the COVID-19 pandemic, and its effects on the banking system. The categories of concentration and centralization of capital and the increasing instability of banking institutions will enable an assessment of banking fragility as well as the impact and repercussions of the pandemic. The economic fragility of India's banking system has been a constant over the past few decades. The objective of this article is to analyze the profitability of the banking system, the banks’ non-performing loans and the government's strategy to prevent a banking crisis.
Acknowledgments
We thank the support from the research project “Credit and Investment: The Problems of the Post-Crisis State,” no. PAPIIT IN300921 of the Directorate-General for Academic Staff Affairs of the National Autonomous University of Mexico (UNAM), and from the Postdoctoral Scholarship Program at the UNAM, and the comments of the two journal’s anonymous reviewers, which were gratefully beneficial.
Notes
1 This article will only study the largest public and private commercial banks, which have more than USD$15 billion in assets.
2 Marx (Citation1975) developed these two concepts in order to analyze the self-expansion of individual capital.
3 It is interesting to notice that the Minskyian theoretical framework is complemented by the Marxian categories above presented. On the one hand, the banking role in the financial system and the economy is destabilizing and the banking practices are part of this dynamic; on the other hand, the concentration and centralization processes provide an explanation of the expansion of the financial capital and configuration of the banking system. All of these elements can find a connection in the NPLs behavior, which reflect the fragility in the whole system.
4 Riskless capitalism is a term used by the former Governor of the RBI, Raghuram Rajan, in a speech in 2014, to refer to the privileged situation enjoyed by some businessmen or large borrowers responsible for the bank's unhealthy bad loans amounts, but not paying the price for the losses suffered from them. Rajan mentioned: “If the enterprise regains health, the promoter retains all the upside, forgetting the help he got from the government or the banks—after all, banks should be happy they got some of their money back!”
5 From a Minskyian perspective, the banking practices are related to the bankers’ motivations leading to a destabilizing role during economic booms. In the case of India, the PSBs and PVBs exhibited different practices, before and after the GFC, well explained in terms of financing patterns and roles by Azad, Bose, and Dasgupta (Citation2017). The most relevant element is the PSBs practices which keep afloat part of the overleveraged non-financial corporate sector by providing credit, as a government strategy. These dangerous banking practices lead to growing NPLs ratios, though the government and its PSBs sustain the situation in order to keep large highly indebted borrowers going, thus enjoying a “riskless capitalism,” or in a broader Minskyian term, a money manager capitalism. Even if the banking institutions are state-owned, the practices tend to the same destabilizing scenario.
6 The data available to analyze the concentration and centralization of capital in the Indian banking system is not complete for the whole period of study, but there is information for the last 15 years, taking into account the total assets of the two bank groups as an indicator. In the introduction, the concentration and centralization processes were explained as Marxian categories in order to analyze the expansion of individual capitals, in this case, financial capitals in the Indian banking system. Thus, the banks’ total assets are the finance or banking capital used to illustrate and analyze the concentration and centralization.
7 Scheduled Commercial Banks refers to the commercial banks listed in the Second Schedule of Reserve Bank of India Act, 1934. They are divided in five categories: Nationalized Banks, Development Banks, Regional Rural Banks, Foreign Banks, and Private Sector Banks. Nationalized Banks and Private Sector Banks are the most important in terms of total assets and profits loads.
8 These measures correspond to the last period of government of Prime Minister (PM) Indira Gandhi.
9 The Indian government refers to disinvestment to designate the sale of shares of state-owned companies with the purpose of obtaining extra funds and give up control for the private sector, being de facto a privatization.
10 After 2003, financial inflows increased significantly due to the growth in stock exchange investments returns, for more details see Chandrasekhar and Pal (Citation2006).
11 Foreign banks have been in India before the liberalization process and increased their participation after it, but not to the extent that they were players important enough to overshadow local banking entities.
12 Through changes to the Banking Regulation Act and the Reserve Bank of India Act, encouraging private sector entry into the banking market, decreasing liquidity and reserve ratios, and seeking to improve the ability to address credit risk by strengthening the capital requirements of public banks with capital market operations.
13 Priority credit sectors are established by the RBI and are listed as follows: Agriculture, Micro, Small, and Medium-sized Enterprises, Export Credit, Education, Housing, Social Infrastructure, Renewable Energy, Others, and Weaker Sectors.
14 It is also possible that during this period a risk-aversion prevented SCBs from growing their credit flows, investing in government securities, though the PSBs were the source for the surge in credit since FY 2004–05; for more details see Azad, Bose, and Dasgupta (Citation2017).
15 FY in India begins on April 1st and ends on March 31 of the following year.
16 Six of these fourteen mergers are related to the SBI and its associated banks. Four mergers of several public commercial banks entered into force on March 31, 2020.
17 In 2019, the Industrial Development Bank of India (IDBI) was recategorized as a private bank, although most of its shares are owned by the state-run company Life Insurance Corporation (LIC).
18 A target bank is an institution purchased or rescued by a bidder bank.
19 The NLPs ratios were growing especially for the PSBs, but these factors had effects on the whole system, above all in the efforts to reduce the amounts of stressed loans, though not exactly on the concentration and centralization processes.
20 On the night of November 8, 2016, the central government announces the withdrawal of all INR500 and INR1,000 banknotes, representing 86% of the currency in circulation, in an economy where informality reaches more than 80% and therefore most transactions are through cash. The government's arguments focused on the fight against “black money” or undeclared money, the financing of terrorism and counterfeit money. A drastic measure of this magnitude, at such short notice, sparked an important debate in the society whose length will last for quite a few years, in particular, on the effectiveness and advantages obtained from it, taking into account that 99.3% of the money returned to the streets, for more details see Chikermane (Citation2018) and The Guardian (Citation2018).
21 In fact, the Indian government has brought lawsuits against the owners and administrators of these financial institutions for alleged credit fraud, opacity, and bad practice.
22 Former Chief Economic Adviser to the Government of India and former International Monetary Fund (IMF) representative in India, respectively.
23 Commercial banks with more than USD$15 billion assets.
24 As noted before, in the boom of 2009–2011, the PBSs had a preeminent role in the financing, similar to the boom from 2003 to 2008 also analyzed by Azad, Bose, and Dasgupta (Citation2017).
25 Net non-performing loans ratio represents total GNPL minus provisions.
26 It is a public sector born entity, whose support served for the creation of other government institutions. However, in 2003, it became a commercial bank and, in 2019, was privatized in a very peculiar way when its shareholding was sold to the state-run LIC and recategorized as a private bank.
27 A bank created in 2015 within the financial company IDFC.
28 The RBI admitted, in its Report on Trend and Progress of Banking in India 2019–20, that the data on banks GNPL ratios do not yet reflect their stress that is obscured by the 2019 moratoriums that hide the true assets quality, and the implications of this for financial stability.
29 The eight core industries are coal, crude oil, natural gas, refinery products, steel, electricity, cement, and fertilizers.
30 In March and April, lockdown was fully implemented.
31 This is judged as the largest quarterly drop since the start of the publication of these statistics in 1996.
32 In March 2020, RBI measures began and the MoF subsequently deployed a response to mitigate the lockdown effects on the Indian economy.
33 In November 2020, this plan was set up, in addition to the moratoriums aforesaid.
Additional information
Notes on contributors
Alicia Girón
Alicia Girón González is coordinator of the University Program of Studies on Asia and Africa, a researcher at the Institute for Economic Research, and a professor at the School of Economics and its Division of Graduate Studies, National Autonomous University of Mexico, Mexico City, Mexico.
Jacobo Silva
Jacobo Silva is a professor at the School of Political and Social Sciences at the UNAM. UNAM, Postdoctoral Scholarship Program at the UNAM, Fellow of the University Program of Studies on Asia and Africa, advised by Dr. Alicia Girón, Mexico City, Mexico.