India’s Bad Loan Conundrum: Recurrent Concern for Banking System Stability and the Way Forward

Soumya Bhadury and Bhanu Pratap

A chapter in Banking and Finance Issues in Emerging Markets, 2018, vol. 25, pp 123-161 from Emerald Group Publishing Limited

Abstract: In the economic literature, a crisis has been thematically defined around bank runs, failure of large financial corporations, and financial distress. Section 1 summarizes our learnings about international banking crisis, in terms of the origin and impact of such crises. This provides us an international benchmark before we delve deeper into India's banking distress, its size and trends. Section 2 focuses on thetwin-balance-sheetcrisis in India. On one side, corporate firms recklessly overleveraged, resulting in excess capacities and business diversification. On the other side, banks, both private and public, fell prey to excessive andprocyclicalcredit lending and improper monitoring. Overall, too many projects were left too weakly monitored. Separately, we have focused on two subsections, first, how the financial institutions in India have overstretched their credit-disposal limit during market upturns. Second, we found absence of any theoretically grounded approaches to determine the capital-adequacy ratios (CARs) for the banks. In Section 3, we have identified the steps taken so far by the Banking regulator and the Government to resolve the crisis. Further, we critically examine the role ofKorea Asset Management Corporation (KAMCO)towards a successful non-performing assets (NPAs) resolution in South Korea. Few key takeaways include, (1) establishing a public asset-management company (AMC) focused on maximization of recoveries and resolution of stressed assets, (2) well-defined governance structure for the AMC ensuring it works on market principles, shielded from political interferences, and (3) realistic asset valuation and transfer price that ensures limited downside risks for the public AMC.

Keywords: Non-performing assets; capital adequacy; bubble loans; pro-cyclical lending; moral hazard; norming (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... 1-038620180000025007
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:isetez:s1571-038620180000025007

DOI: 10.1108/S1571-038620180000025007

Access Statistics for this chapter

More chapters in International Symposia in Economic Theory and Econometrics from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().