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Indian banks are among the most vulnerable in the G-20 economies today. Here’s why
A mounting pile of bad loans, poor accounting standards and growing evidence of lax supervision and banking fraud highlight the deep rot at the core of India’s financial system.

  When the Indian economy and its banking sector emerged relatively unscathed after the global financial crash of 2008, India’s financial system became the envy of the world. That seems a distant memory today as the banking sector of the country reels under one of the worst crises it has faced in a long time. A mounting pile of bad loans, poor accounting standards and growing evidence of lax supervision and banking fraud—unearthed over the past few weeks by several government agencies—highlight the deep rot at the core of India’s financial system.
The broad numbers also tell the same story. In 2009, India had among the lowest ratio of non-performing assets among the largest economies of the world, which form the elite G-20 club. Eight years later, it has among the highest ratio of such assets, as the chart shows.
To be sure, the chart understates the extent of the problem in India’s banking sector in 2009, when a combination of regulatory forbearance and poor accounting standards may have served to hide the real extent of the bad loan problem.The fact that India’s bad loan ratio looks grim today has a lot to do with the fact that India’s central bank has been prodding banks to recognize such toxic assets over the past few years—after long years of quiet forbearance. Be that as it may, the rise in bad loans and the lack of adequate provisions has put Indian banks in a tight spot now.
India’s banking sector lags those of most other large economies in terms of capital adequacy. Capital adequacy refers to the ability of a bank to withstand significant losses on its risky assets. India fares poorly in this regard despite a relatively conservative loan-to-deposit ratio. What makes matters worse is that the actual capital adequacy in Indian banks might be much worse than reported. To illustrate, if we assume the entire fraud amount of Rs12,700 crore as loss for the Punjab National Bank (PNB) then its capital adequacy ratio (CAR) in December 2017 would have stood at 9% instead of the reported figure of 11.6%. The RBI has set 9% as the minimum threshold for total CAR. Total CAR refers to total equity and reserves of a bank, expressed as a percentage of its risk-weighted assets.
Also, there are reasons to believe that all of India’s bad loans may not have been accounted for yet. The latest quarterly results of the country’s largest lender, the State Bank of India, in which the bank posted surprise losses on account of higher-than-anticipated bad loans, shows that the bad loan saga may not be over yet. SBI officials have, of course, claimed that the worst is over.
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